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Lance Inc. (NASDAQ:LNCE)

Q4 2007 Earnings Call

February 14, 2008 9:00 am ET

Executives

Russell Allen - Director of Planning and Investor Relations

Dave Singer - President and Chief Executive Officer

Rick Puckett - Executive Vice President and Chief Financial Officer.

Analysts

Heather Jones - BB&T Capital Management

Sarah Lester - Sidoti & Company

Mitchell Pinheiro - Janney Montgomery

Jon Feeney - Wachovia

Diane Geissler - Merrill Lynch

David Leibowitz - Burnham

Terry O’Connor - Cedar Creek Management

Margot Murtaugh - Snyder Capital

Operator

Welcome to the Lance Incorporated Conference Call. All lines will be in a listen-only mode until the question-and-answer segment. (Operator Instructions)

I would now like to turn the conference over to your host Mr. Russell Allen, Director of Planning and Investor Relations for Lance Inc. Please go ahead, sir.

Russell Allen

Thank you, Vonda, and good morning, everyone. With me today are Dave Singer, President and Chief Executive Officer and Rick Puckett, Executive Vice President and Chief Financial Officer. In today’s call, Dave and Rick will discuss our 2007 fourth quarter and full year results as well as our outlook for 2008.

As a reminder, we are webcasting this conference call, including the supporting slide presentation on our website at www.lance.com.

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

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

Rick Puckett

Thanks, Russell and good morning, everyone. I would like to direct everyone’s attention to the slide presentation that has been provided. We will be talking through these slides and telling you the page to direct your attention to. So, my first page of attention is page 4, as we go through some highlights for the last quarter of 2007.

We have significant escalation in ingredient cost as we had talked about at the end of the third quarter. And during quarter four, this negatively impacted our margins pretty significantly and specifically, the wheat and vegetable oils were the most significant.

We did have solid revenue growth in our core products and channels, specifically Home Pack and Cape Cod were up double digits. Non-branded was up almost 16%. Improved operating efficiencies in supply chain and DSD operations continued through the quarter. We will see some slides on that in a few seconds.

And we also begin implementing price increases that were effective in the first quarter of 2008. If you look at page 5, you will see a history of wheat over the last year, all of 2007 is represented on this chart and you can see that the first half of the year was averaging somewhere around $4.50 per bushel. If you look at the current situation, far to the right of that slide, you will see it’s close to $10.50. That difference is equal to, on an annualized basis, about $0.96 in earnings per share. So, the leverage on wheat for us is pretty significant and it obviously impacted our fourth quarter.

On page 6, you will see a similar slide on soybean oil, which is the basis for most of our cooking oils. The first half averaged around $0.35 versus the current average around $0.55. That equals about $0.47 in earnings per share on an annualized basis.

Let’s go to page 7 and look at the financial summary. Net sales were $185.2 million for the quarter, compared to $172.4 million for quarter last year. That’s a 7.4% increase. The gross margin was down 580 basis points, almost entirely driven by ingredient cost increases. The SG&A expense percent was actually up almost 200 basis points. That is the efficiency gains that we are seeing in DSD and supply chain as we have been talking about. Therefore, the operating profit is down 4% versus last year. Our diluted earnings per share for the quarter were $0.03 of share compared to $0.19 last year.

Going to page 8, we will be starting to talk to you in the future about branded and non-branded. So, we are looking at it here in terms of revenue. And branded sales were $113.6 million or a 2.7% increase over same quarter last year and non-branded were actually up almost 16%, $71.6 million.

Turning to the full year highlights on page 9, we began realizing the productivity and efficiency gains that we mentioned and we have been focusing on. We actually reported a run rate at the end of Q3 approaching $1 per share. Significant earnings momentum through the first three quarters prior to the spike in ingredient costs actually was something we were seeing.

We had solid revenue growth again from the key product lines and channels, specifically Home Pack, Crackers and Cape Cod, were both up double digits. We did see the increase in ingredient cost late in the year and it significantly impacted our full year earnings.

In addition, our earnings were reduced by foreign currency impact, the Canadian dollars specifically by approximately $2 million or about $0.04 per diluted share for the year.

Looking on page 10 at the financial highlights, we ended the year at $762.7 million in revenue, a 4.5% increase over last year. Gross margin was down 140 basis points, again driven primarily from the ingredients cost increases, but offset to some degree by the supply chain efficiencies. We made significant progress on our SG&A expense at 210 basis points year-over-year and therefore, our operating profit actually increased year-over-year by about 60 basis points.

One of the things we have said in the past is that we are looking to grow our bottom line faster than our top-line and we were successful at doing that even in the face of the ingredients cost increases during 2007. You can see that we grew our net income and diluted earnings per share about 15 to 18%. One other note is our tax rate is slightly less than it was last year. It was 34.8% last year and 34.4% this year.

Turning to page 11, looking at branded and non-branded on a full year basis, again, branded was up almost 3% year-over-year and non-branded was up 7%. And the non-branded revenue was helped by the fourth quarter volume increase.

On page 12, we show some EBITDA statistics and net debt statistics. And you are seeing that EBITDA is up 16.5% year-over-year. It went from 8% to 8.9% of revenue. Net debt actually decreased by 7% year-over-year and as you can see our leverage ratio is 0.6 versus 0.8 last year.

Now let’s look at a few charts to get some trends. On page 13, we are looking at the revenue growth by quarter and if you’ll look at the Q1 2007, keep in mind that this is a result of the SKU and customer rationalization that was going on at Tom’s early in 2006. So year-over-year that quarter only increased by about 1%. And as you can see, we have been growing revenue pretty well throughout the year relative to 2006. One note is branded revenue represents 63% of our revenue today and non-branded is 37%.

Turning to page 14, we are looking at a gross margin trend here by quarter and also the red line represents a trailing four quarters. So, you can see a trend and it was a pretty nice trend as we had been introducing supply chain efficiencies in the manufacturing operations until the ingredient cost escalation hit us in the third and fourth quarters of this year. But it had been running pretty steadily at 43 to 43.5% kind of number until just recently.

On page 15, this is the SG&A percent of net revenue and again, you will see a quarter-by-quarter bar chart and a line representing a four quarter trailing. And the trend is a downward trend and if you look at the difference actually between the end of ‘06 and the end of ‘07, it’s well over 200 basis points improvement, which is about 15 to $18 million to our bottom line. So, this was helping us a great deal to offset some of the ingredients cost increases, but not enough to offset all of those in 2007.

On page 16, the operating profit margin, we were seeing a great trend driven by the efficiencies in the early part of this year getting as high as 8.2% in the second quarter of ‘07 and actually running at a four quarter kind of number at 6.4% at that point. But then again, the ingredient costs came in and we have been taking a bit of a downturn until we get pricing in place to recover that.

On page 17, we are looking at selected cash flow items and you will see a 34% improvement in cash flow from operating activities going from 39.1 to 52.3. And in fact, if we look at subtotal free cash flow before dividends, we were negative last year and positive this year and you can see that our dividends paid were actually pretty consistent year-over-year.

One note here is that I would say that the $39.5 million of capital expenditures was a little lower than we expected and as we had guided. But there is about $5 million that will be included in our guidance for 2008. So, that will be a carryover into 2008.

On page 18, we are providing the estimates for 2008. Our net sales estimates are $790 million to $820 million. Our diluted earnings per share estimates are $0.70 to $0.80. And our capital spending range is $45 million to 50 million. There is a larger range in net revenue due to a couple things. Certainly, the uncertainty around price elasticity at these pricing levels that we are having to make.

In addition, we will have $15 million less revenue in non-branded business due to some lost business. Nothing in terms of service or quality or anything like that, it’s really customers making some decisions around product categories.

In addition, we may require additional pricing in the second and third quarter due to continued ingredient cost escalation. There is a larger range in earnings per share due to the uncertainty around ingredient cost escalation, which still exists in the marketplace.

In addition, the EPS is certainly more heavily weighted towards the back half of the year as we catch up pricing with the ingredient cost. And as I mentioned a few minutes ago, the CapEx does include about a $5 million carryover from 2007.

I’ll now turn it over to Dave Singer for other comments.

Dave Singer

Thanks, Rick. If you can flip to page 20, I would like to spend a few minutes reviewing our strategic approach and our progress against our key priorities. Then I will talk about our 2007 results and our focus and expectation for 2008.

As we have discussed, we have been focused on two key financial goals and one is accelerating our revenue growth, and the other is widening our profit margins. Our approach is pretty straight forward, to develop a solid foundation for profitable growth and to develop a focused approach to growing our top line.

Our approach to building our foundation includes two key items: first is building a team of talented executives and managers and organizing in a way that help support achieving our goals. Second is making the required investments and assets and process redesign to make Lance competitive in areas that are critical to its success. These include our supply chain, our DSD system and our information systems.

Our approach to top line growth comes in two phases. Our first phase relates to a sharp focus on our core strength and a simplification of our business. This includes discontinuing our vending operation, rationalizing SKUs and tightening our focus to product lines, channels and geographies in which we can profitably grow.

Our second phase is focused on accelerating sales growth in both branded and non-branded businesses. Our approach includes more internal innovation and partnerships and acquisitions with snack food company’s brands or product lines, that will help make us a better partner for our customers, leverage the talents of the newly formed team and leverage our customer relationships and our operational capacities and capabilities.

Our approach is quite expensive in the near term. We have added significant cost as we built the team that will drive change, grow sales and support the business we envision in the future. We have added significant cost also as we have invested in more productive assets and business processes, which has driven a significant increase in capital spending during the 2006 to 2008 timeframe.

If you flip to page 21, I would like to provide an update on our progress in 2007 and then begin to talk about expectations for 2008. As we have discussed, our approach relates to building a foundation and focus sales growth. On this chart, our foundational work is centered on organizational effectiveness and operational efficiencies.

From an organizational perspective, we’ve made much progress in 2007. We have largely completed building our new leadership team, of which, 40% were promoted from within, and 60% came from outside Lance. We have reorganized our management across functional lines to provide focused functional expertise to the areas we’ve targeted for improvement, like our supply chain, our DSD efficiencies, and our IT system.

We’ve also ceded the 1Lance culture, which is focused on instilling an attitude of continuous improvement and adaptability of the change, working towards common goals and the spirit of teamwork and inclusion.

From an operational efficiency perspective, 2007 was an excellent year. In our DSD system, we discontinued our vending operation and reengineered our routes to be more efficient and focused on driving growth in our more profitable channels and customers. We have replaced an old unreliable and inefficient handheld computer system. We continue to replace aged route vehicles and we now have fewer than 20% of DSD fleet that is more than 10 years old as compared to nearly 50% in early 2005.

We were able to drive more than a 10% increase in average revenue per route, which is growing about 30% over the past three years. Revenue per route is one of the most important indicators of a healthy DSD system. Our retention rate for route sales representative, which had been way too low, improved significantly in 2007 and we are now hiring and training 300 less people on an annualized basis.

In our supply chain, we have completed the centralization of all functions including procurement, logistics and manufacturing operations. We now produce salty snacks in Texas and Florida and have begun to use higher capacity trailers, which together has dramatically reduced the number of miles we drive each year and positions us to deliver wider margins as we grow our business.

We have implemented the demand planning tool and converted to a one forecast system that will reduce the risk of out of stocks and allow us to further improve our inventory turnover. We’ve begun the implementation of lean manufacturing, which has already begun to deliver results, including significant improvements in raw material yields and increased volume per line hour, which will reduce our operating cost and provide more production capacity without added capital investments.

In our information systems area, we have a new Chief Information Officer, who has a track record that includes multiple successful Oracle implementations and direct experience in our business segments. We have successfully completed the first of several phases of the Oracle implementation. We have implemented powerful new sales analysis tools and reporting systems and a new budget system and a new demand planning system.

With regard to our initiatives in driving our top line, we have completed the building of our sales and marketing team. We have experienced solid growth in our most profitable product lines and channels of business. We have had excellent market share performance in our leading sandwich cracker and kettle chip businesses. We refocused our marketing campaign for sandwich crackers towards mothers with children, where we believe we have excellent growth potential. And we also made an investment in Late July in Organic Cookie and Cracker Company.

If you flip to page 22, our earnings per share in 2007 is non-indicative of the underlying earnings power of Lance. As Rick mentioned, our profitability was squeezed particularly in the fourth quarter by the rapid escalation of commodity prices, which jumped prior to our ability to execute pricing. The earnings story for Lance for 2007 is really a two part story. Two parts meaning both two parts of the year before and after the commodity increase and also meaning our two business areas, branded and non-branded.

Through September, our earnings and margin performance was solid. We saw wider margins and earnings per share grew. Our 12-month earnings per share through September was more than $0.90 despite the commodity squeeze, which began to impact our results in September and hit us for more than $0.05 per share in September.

During the first nine months of the year, our branded business saw our margins increase by more than five points versus last year, reflecting the operational improvements we’ve been engineering as well as the benefits from our focus on our most profitable product lines and channels of business.

During the first nine months of 2007, our non-branded margins were down about two points, reflecting a timing lag between the commodity bump in late 2006, and our ability to capture pricing. The foreign exchange issue that Rick mentioned, as well as a slight negative shift in mix and the September commodity issue that squeezed our private brand business more than our branded business.

During the fourth quarter, the commodity increase drove our branded profit margin down by about two points versus last year, because our operational efficiencies and the mix shifts were not enough to offset the commodity increase. In our non-branded business, the hit was much harder with an 8% decline in profit margin. For the full-year, our overall margin was up slightly, a little less than a point, which reflected about a three point increase in our branded margins and about a three point decrease, in our non-branded margins.

If you will flip to page 23, I would like to talk about 2008. With regard to our guidance for the year, I think its important to recognize the unprecedented level of pricing, we are taking, which when we implement a second round to cover the recent run-up in wheat and oil, will yield an increase in some of our non-branded businesses, as much - of as much as 25%. We have significant operating leverage. Each 1% change in operating margin yields a $0.17 change in earnings per share.

In 2008, our focus will be in our branded business to maintain and extend the improvements that we’ve gained in 2007. We intend to execute pricing to offset ingredients cost. We intend to continue to improve the cost efficiencies and continue to drive mix improvements.

In our non-branded business, we intend to regain our margins with pricing. This will improve through the year with expectations and completion by the second half of 2008. We also intend to grow and widen our margins. We will grow as the private brands market grows and will increase our margins by increasing our mix of premium products.

If you will flip to page 24, as we move through 2008, it will become clear that we are on-track and we will see the margin and EPS rebound that we expect. The indicators of our success, in the branded area will be continued revenue growth in our core business lines, the execution of pricing to regain our profit margins, continued improvements in efficiency, including areas of DSD and supply chain.

In our non-branded business, success will be measured by continued revenue growth, the execution of pricing to regain our profit margins and success in improving our growth in premium items.

In summary, we remain very confident that our initiatives are bearing fruit as evidenced by the earnings trend prior to the commodity increase in 2007. Our operating leverage will result in a squeeze in our first half earnings especially in the first quarter as we chase the commodity increases with additional pricing actions. The pricing that we put in place for the beginning of the first quarter was based on commodities that have subsequently increased significantly since the middle of the fourth quarter. We are confident that we’ll ultimately passthrough our commodity increases and we fully anticipate that our margins and earnings will rebound and we’ll be back on the trend established in the first part of 2007.

We’ll now open the phone lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions). So, our first question comes from the line of Heather Jones with BB&T Capital Management.

Heather Jones - BB&T Capital Management

Good morning.

Rick Puckett

Good morning, Heather.

Dave Singer

Good morning.

Heather Jones - BB&T Capital Management

And Happy Valentines Day.

Dave Singer

Same to you.

Heather Jones - BB&T Capital Management

Thank you. I have a few questions. One, I was wondering your guidance, does that assume that looks in Soybean oil price is currently I think around $0.53 and wheat, spot basis are 9.50 to $10 range, does your guidance assume, it stays in that range?

Dave Singer

At this point it does. We have looked forward. We’ve bought some commodities. We own more in the early stage of the year and less in the later stage of the year. But at this point, it assumes that commodities will stay there, and we will ultimately get enough price to cover them.

Heather Jones - BB&T Capital Management

Okay. And as far as the price increases you took last year, the branded price increases, are those fully implemented now?

Dave Singer

The branded pricing is in place as of January 1st, but the pricing was based on a lower level, but in our branded business, we are being very careful because of the pretty wide margins that we have, and we have to be more comfortable, we have a sense of what the price elasticity will do.

We’ve taken more of an increase than we’ve seen in many years, and we really don’t have experience with what price elasticity might do at this new level. And so, we will track that during the first quarter, and decide if we need more pricing or if where we are is a good number.

Heather Jones - BB&T Capital Management

So, basically, see what commodities do, as well as, how volumes respond at this pricing before you take another?

Dave Singer

On the branded side, yes; on the private brand side no. Because of the margin structure in the private branded side, we and as well as everybody in the industry is very focused on taking a second round of pricing, and as I said, the level of price increases are as high as 25% in some of our private brands lines. But our original pricing that we took effective January 1 was well under half of that.

Heather Jones - BB&T Capital Management

Under half what, I’ve missed the...?

Dave Singer

We have a range in private brands pricing now, that would range based on the product line between 15 and 25%. In the first part of the year, it was based on a different set of commodity assumptions, and the pricing we took was quite a bit low in that. So, we were actually taking more price in the second round than we took in the first round.

Heather Jones - BB&T Capital Management

So, it’s okay, okay. Is the 15 to 25% is that cumulative across both rounds or that’s what you’ve already taken?

Dave Singer

Yeah.

Heather Jones - BB&T Capital Management

Okay, cumulative. Okay.

Dave Singer

That’s cumulative.

Heather Jones - BB&T Capital Management

And you are saying the branded side is less than half of that range?

Dave Singer

Yes. Well, well less than half of that - way less than half of that. Our branded gross margins are about triple of non-branded gross margin.

Heather Jones - BB&T Capital Management

Now, going back to your guidance of $0.70 to $0.80, does it also assume, let’s say, commodity stay where they are, does that assume you put through another price increase?

Rick Puckett

There certainly is some price increase built into that guidance, Heather, as Dave mentioned, especially, on the non-branded side. There is no assumption in there relative to additional pricing on the branded side. But again, our branded pricing is along with our efficiencies that we have on the branded side are keeping our margins pretty well in place.

Heather Jones - BB&T Capital Management

Okay. And I know it’s always.

Rick Puckett

Obviously, if commodities go up from here and stay at these levels that we are currently seeing, then it will cause us to give a lot of consideration to a branded price increase in the second and third quarter.

Heather Jones - BB&T Capital Management

Okay. The first January and first half of February, have you seen any indications to what volumes are doing on the branded side?

Rick Puckett

Not so much, yet. It’s still pretty early to measure any kind of elasticity coming out of our pricing. We’ll have a much better feel for that at the end of the first quarter.

Heather Jones - BB&T Capital Management

Okay. And then going on your slides, you said something about only a 200 basis point decline in margins for brand, and compared to I think it was 800 basis points for private label. Understand that there is more flour exposure on private label versus branded. But also could the disparity be explained as well by the internal initiatives you’ve had in place?

Dave Singer

Yes. It’s a combination of better mix, cost efficiencies and the fact that it’s less exposed to the commodities than the private brand business.

Heather Jones - BB&T Capital Management

Okay.

Dave Singer

And most of our internal initiatives, if you look at everything we’ve focused on, it has been focused for the most part towards our branded business, not that we are not interested in the non-branded business, it’s just that that had been operating pretty efficiently for several years, and most of our attention and focus was on the branded operational efficiencies and mix shifts.

Heather Jones - BB&T Capital Management

How much did commodity cost, cost you during the quarter?

Rick Puckett

In terms of versus last year, Heather?

Heather Jones - BB&T Capital Management

Yeah, year-over-year.

Rick Puckett

I mean, it was approximately $10 million, just in the quarter.

Heather Jones - BB&T Capital Management

Okay. And then my final question is the loss sale the 15 million was that on the co-packing side or private label?

Rick Puckett

It’s a combination of both actually, but the majority was on the private label side.

Heather Jones - BB&T Capital Management

Okay. Thank you.

Operator

Your next question comes from the line of Sarah Lester with Sidoti & Company.

Sarah Lester - Sidoti & Company

Good morning.

Rick Puckett

Good morning, Sarah.

Sarah Lester - Sidoti & Company

I wanted to ask, just not to beat a dead horse, but to go over pricing again on the private label, just go over the timing, the first round and the second round. Can you remind me of when that was?

Dave Singer

Yeah. Our first round of pricing in private brands took effect for the most part at the beginning of January. Some took a little bit later than that, but for the most part it’s the beginning of January.

Sarah Lester - Sidoti & Company

Okay.

Dave Singer

The second round we anticipate taking place at the beginning of the second quarter or during the second quarter. It takes a little bit of time to both negotiate and then actually get prices implemented. So, that’s kind of a timing that we are looking at currently. Now, we have not gotten all the second round pricing sold-in and agreed to yet. But what we are seeing across the industry is that everybody is looking for similar issues because we have similar margin structures and similar cost issues.

Sarah Lester - Sidoti & Company

Right. My next question was, your private label or non-branded last year growth was pretty strong. Could that have been sort of at the expense of margins? I mean, do you think you gained some business sort of because your prices were competitive?

Dave Singer

That’s possible. Some of that increase was not in our private brands business. Some was in our contract business. But I think there is a chance that part of that was due to that.

Sarah Lester - Sidoti & Company

Okay. And then for 2008, your plans for all of your cost-cutting, would we expect to see more of an impact on gross margin this year, or are we still going to see a big change in delivery cost. Can you sort of shed some light on which line we are going to see savings?

Dave Singer

Well, the one thing. We should see savings across the board; unfortunately, it’s going to be hard to see savings in the gross margin line because the commodities are such a large implication and between commodity and pricing it will be hard to see the savings that we are talking about. But...

Sarah Lester - Sidoti & Company

Right.

Dave Singer

We anticipate becoming more efficient across the entire supply chain, as well as our DSD system during ‘08 and ‘09.

Rick Puckett

And then, we will continue to show the charts that we’ve just showed today as it relates to SG&A. So, that you can track those.

Sarah Lester - Sidoti & Company

Okay. And for delivery cost, there is a pretty big change from 2006 to 2007, should we expect another big change like that are is it going to be more modest?

Dave Singer

Well, I think over time, we are going to continue to see improvements; part of the improvements next year are going to be masked by a pretty significant increase in gasoline and diesel fuel.

Sarah Lester - Sidoti & Company

Okay.

Dave Singer

So, but the underlying statistics like cases delivered per DSD route or cases shift in our supply chain we see those statistics improving in the near-term; as these commodities including fuel increase, it will mask some of that improvement.

Sarah Lester - Sidoti & Company

Okay. And then my last question, your purchases of flour and oils, I think you had mentioned before that you are purchasing a little bit forward now, is that the case?

Dave Singer

Yes. We have a program that purchases almost all of our commodities on a forward basis to some degree. At the highest level in history on many commodities, we are not as far out as we would intend to be over a longer period of time. But, yes, we are very focused on trying to purchase forward to help reduce the variability in our earnings.

Sarah Lester - Sidoti & Company

Okay. That’s all, thank you.

Operator

Your next question comes from the line of Mitchell Pinheiro with Janney Montgomery.

Dave Singer

Hello, Mitch?

Mitchell Pinheiro - Janney Montgomery

Hello, there. Can you hear me?

Dave Singer

Good morning, Mitch.

Mitchell Pinheiro - Janney Montgomery

Hey, can you...?

Rick Puckett

Yeah. We can hear you.

Mitchell Pinheiro - Janney Montgomery

Okay, great. Yes, good morning and Happy Valentines Day, as well from me.

Dave Singer

Thanks, Mitch.

Mitchell Pinheiro - Janney Montgomery

Hey, listen, a couple of things. One is, could you talk about pricing and volume and mix in the fourth quarter numbers?

Rick Puckett

Well, there is very little pricing that actually hit the fourth quarter, honestly, other than the pricing that was put into place at the beginning of the year in 2007. As Dave mentioned a few minutes ago, most of our pricing that is resulting from the recent run-up on input cost are hitting at the beginning of January and in the first quarter. So, there is very little pricing related to the fourth quarter.

Mitchell Pinheiro - Janney Montgomery

Okay.

Dave Singer

And when you look at volume and mix, Rick had showed that the branded business was up about 3% and the private brand - I mean, the non-branded business was up around 15 or so. So, from an operating margin perspective, that’s a slight negative mix.

Mitchell Pinheiro - Janney Montgomery

Okay

Dave Singer

Within branded, the mix was soft.

Mitchell Pinheiro - Janney Montgomery

And then, in terms of- what was volume would you say roughly?

Dave Singer

Very close to the sales dollars.

Mitchell Pinheiro - Janney Montgomery

Okay, okay. You made a point in the press release where you talked about double digit growth in Cape Cod branded and where was it the - you called it Home Pack sandwich crackers was up double digit, so I’m assuming single serve was not up double digit, is that correct?

Rick Puckett

Well, actually if you look at the branded growth rate, Mitch, and we’ve talked to this a few times is that, we have a couple of declining segments of our branded business, specifically, the food service business and the DSD, and also the up and down the street business. So, that certainly masked the branded growth that you would expect to see.

Dave Singer

But your question directly about the single-serve sandwich cracker, it was not up double digits, part of that, was the channels in which we sell that have not been growing as fast, convenience stores is a big channel, that was, our overall convenience channel was probably up about 4%, but it’s also sold in the up and down the street business, which is shrinking.

Mitchell Pinheiro - Janney Montgomery

Well, if you had, I recall, you were raising prices from $0.59 a pack on single-serve up to 69, which is a 17% increase that’s only a dime, but percentage is big. So, I was wondering, whether that had any impact in the fourth quarter or is it all a post January 1st impact?

Dave Singer

I think you are going to see most of that’s a post January 1st issue.

Mitchell Pinheiro - Janney Montgomery

Okay.

Rick Puckett

Keep in mind that’s a retail price increase.

Mitchell Pinheiro - Janney Montgomery

Correct. Did Late July have any impact on the quarter?

Rick Puckett

No, not really. It’s a small operation as you know and it was very immaterial.

Mitchell Pinheiro - Janney Montgomery

Okay. And would, I know that brand has gained some distribution points, has anything else, has it gained any distribution, lately?

Rick Puckett

Well, we’ve been successful you are talking about Late July, right.

Mitchell Pinheiro - Janney Montgomery

Correct.

Rick Puckett

Is that right?

Mitchell Pinheiro - Janney Montgomery

Yes.

Rick Puckett

Okay. Over the last quarter and in Q4 of last year, we started manufacturing, so, we are now co-producing everything that they sell. So, we are in a position now to leverage that capability going forward. So, that sort of happened in the fourth quarter. We were concentrating on making sure we got the efficiencies down and the product down. And therefore, we will continue to grow that business in 2008 and 9.

Mitchell Pinheiro - Janney Montgomery

Does that you have any growth from Late July in your 2008 revenue forecast?

Rick Puckett

Some, but not a whole lot.

Mitchell Pinheiro - Janney Montgomery

Modest, okay.

Rick Puckett

Yeah, modest.

Dave Singer

Our late July related sales are really a contract production arrangement. We only own a minority ownership position. So, for the most part, the sales are contract sales to them.

Mitchell Pinheiro - Janney Montgomery

I thought you might have done some distribution also?

Dave Singer

Sure, we are testing that but...

Mitchell Pinheiro - Janney Montgomery

Okay.

Dave Singer

We are not sure where that will end up.

Mitchell Pinheiro - Janney Montgomery

Okay. Was there any, any currency, any Canadian dollar impact in fourth quarter?

Rick Puckett

There was Mitch, of the $2 million or so for the year. And I would think that it’s somewhere around 25% it’s at least probably $0.5 million in the fourth quarter.

Mitchell Pinheiro - Janney Montgomery

Okay.

Rick Puckett

They may be 7 or 800,000, but...

Mitchell Pinheiro - Janney Montgomery

Okay. And what have you done from guidance point of view is that, do you factored that in for ‘08 or?

Rick Puckett

We have and quite honestly our assumptions right now are pretty close to where its running and we’ve had some of it as well into 2008. So, we are pretty comfortable that our foreign exchange is not going to be a dramatic hit for us next year.

Mitchell Pinheiro - Janney Montgomery

Okay. So, when you look at - if you sort of just take a midpoint of your guidance range of $0.75, it’s essentially basically a flat year, year-over-year. Is there any way that you could quantify sort of what you expect the commodity part of the guidance in terms of dollars or should I just?

Dave Singer

Mitch, I think it’s important to recognize that the amount of operating leverage we have relative to the bottom line. We are looking at - when you looked at those chart Rick showed, yet, if you look at where we were for most of the year for half of the year in 2007 compared to 2008, I think he pulled out what it was $0.96 in wheat and $0.24 or so...

Rick Puckett

$0.47.

Dave Singer

$0.47 in oil, there are such large increases relative to earnings, and in order to offset those, we have to take very large price increases. And so, depending on how quickly the prices get implemented, how quickly the second round gets implemented, and where commodities end up, there is a significant amount of variability in earnings per share potential and as you said, it’s a flat year on an EPS basis, but it’s heavily weighted towards the second half.

The squeeze we experience will - the majority of that should be in the first quarter, and we will see less of a squeeze in the second quarter. And then particularly the fourth quarter should be a pretty significant rebound, and so the year will be kind of the mirror opposite of the 2007 year.

Mitchell Pinheiro - Janney Montgomery

Right. Just one more question, and so, if I back out $10 million of commodity cost in the fourth quarter, you actually had a roughly 50 basis point improvement in the sort of let’s call the underlying operating margin in the quarter, in my estimate, it might so, as that relates to 2008 if we try - I know it's hard to isolate commodity cost to point - your previous point with demand elasticity, but if we could isolate commodity cost and separate it from the rest of the - your operating fundamentals, do you anticipate a year-over-year growth in your operating margin?

Dave Singer

I think that ultimately, we would anticipate overtime growth from all the things we’ve talked about, some things that are being cross currents will include fuel, there is a lot of big increase in gasoline and diesel fuel. We are looking at depreciation; actually, it’s going to be up significantly because we are in kind of the third year of a heavy up spending, which actually next year is the final year in our mind, of the heavier spending than normal. Rick, do you have any other...?

Rick Puckett

I mean in addition to that medical cost and, some other fringe benefit cost will be up year-over-year.

Mitchell Pinheiro - Janney Montgomery

Is there anything going down?

Rick Puckett

Pardon.

Mitchell Pinheiro - Janney Montgomery

Is there anything going down?

Rick Puckett

Yeah. Our cost to produce and our cost to deliver, from efficiency perspective is still going down.

Mitchell Pinheiro - Janney Montgomery

Okay. All right guys. Thank you very much.

Dave Singer

Thank you.

Rick Puckett

Thanks, Mitch.

Operator

Your next question comes from the line of Jon Feeney with Wachovia.

Jon Feeney - Wachovia

Good morning. And thank you.

Dave Singer

Good morning.

Jon Feeney - Wachovia

Both you and Rick have talked a little bit about, especially your comment about you haven’t - you don’t know exactly what the elasticity is going to be from some of these price increases. And, I guess kind of an un-chartered territory. I guess that’s certainly a fair statement but at least recently but, it seems like - I mean is there any work you’ve done or work you have access to where I mean clearly you are deciding to be a little bit more thoughtful and deliberate about taking out prices than just constantly reaching agreement. I would say, would have been - immediate fourth quarter or something. So, I guess is there some data you are seeing out there, that suggests to you that when you takeout prices, you are going to see the very rapid volume growth, you guys have fall-off?

Dave Singer

Are you talking about in private branded business, or in the what...?

Jon Feeney - Wachovia

I am talking...

Dave Singer

Is it just related to the overall business.

Jon Feeney - Wachovia

I am talking about the overall business will be interesting too, but I think I understand the dynamics of the private label business, the overall - the retail business is what I am most interested in. What data you would like sort of going now when you said you are little bit cautious on the elasticity effect?

Dave Singer

Well, we have access to data from Nielsen and there is other models that help to give us a perspective about elasticity. However, as you said, we are uncharted waters. We are taking more price points than we’ve seen in any experience that we’ve had, and the other thing is that some of our products lines have extremely high gross margins.

So, we could end-up maintaining our margin percentage, but have enough of a hit that you don’t make more money. So, with the types of increases we are lending at, we just want to be cautious. We’ve got solid trends in place, and we have great customer relationships and great trends in market share and we just want to be a little careful on that branded business. We’ve seen even with the commodity squeeze, we saw a three point increase in our branded margins during the year. And so, as we move forward, we should be a little cautious.

Jon Feeney - Wachovia

When you look at some of the comparable categories and again I am just talking about the retail business, I mean it is - largely I guess I would say, the impulse items, big convenient store presence. Reasonably, low absolute dollar price point - in price points and therefore low absolute amount of dollars, you would be raising prices.

When I think of other categories like say chewing gum, pricing is up dramatically, I mean, across the category, I think 8.5% on that retail. I mean how do you think of your sort of retail branded business, what are some comparable categories in it we can look at and say like okay well these are places where - these have similar demand dynamics to Lance retail branded business?

Dave Singer

Yeah, you said 8.5 and said dramatic. A large portion of our branded product line is looking at price increases or close to that.

Jon Feeney - Wachovia

But starting in January?

Dave Singer

Yes.

Rick Puckett

And at retail, as Mitch referred to earlier it’s even greater. So...

Jon Feeney - Wachovia

Right. So, I guess, let’s just wait and see right?

Dave Singer

I think at this point that’s the best guidance we have. We are really are in a, as you said, un-chartered waters, we have been making lots of progress, we feel confident that we’ll weather this. My experience in the soft drink business with price increases was that you ended up initially having a little bit of a hit, and then, people got used to the pricing and you were back on the beam.

Jon Feeney - Wachovia

Okay. And just one other thing, when you look at - I mean, on sort of taking advantage opportunity note, I mean, has the disappearance of maybe the financial sponsors and had some recently low debt rates, is there any like particular areas of acquisitions think of become more attractive? Does this high commodity price environment worsen or will improve your prospects for - in doing something in 2008?

Dave Singer

Well, I don’t know whether that improves or worsens our prospects, but we are very focused, and we believe that we will do some acquisitions during 2008. We are focused on both branded and non-branded. The non-branded areas would be things that kind of fit with our strategy of doing more premium items or expanding our product line in the branded area. It’s again about expanding our product line, becoming more important to our customers. We are looking very hard at opportunities in the acquisition side, because as we said, the work that we have done to this point is to build an organization that can operate a much larger business. And we are not doing that just to have the organization. We are doing that with the anticipation that we are going to start to layer on acquisitions. As you noted interest rates are low, the financial sponsors are gone, so that should be good for pricing and we don’t have much leverage. So, we have access to capital.

Jon Feeney - Wachovia

Okay. Thank you.

Operator

Your next question comes from the line of Diane Geissler with Merrill Lynch.

Diane Geissler - Merrill Lynch

Good morning.

Rick Puckett

Good morning, Diane.

Diane Geissler - Merrill Lynch

Hey, I have question for you about some of the material on the slides, and thanks so much for making that available, very helpful. Particularly on the wheat and the soybean oil, which I think we have covered pretty extensively here. But, I just want to make sure that I’m understanding your comments here so, of the $0.19 and the $0.47 when I back into what that would be on a pre-tax basis, I guess something around, call it, 66 to 67 million?

Rick Puckett

That’s about right.

Dave Singer

Yeah, if you go from the first quarter run rate to where it is in the first quarter of ‘08, that’s pretty close.

Diane Geissler - Merrill Lynch

Okay. So, I guess my question is, you called out a $22 million increase in cost of ingredients in ‘07 on a pre-tax basis. So, here is the question. Should I read that - is that a net number, net of your cost efficiencies or should I read that as we have got an incremental 45 million in ‘08 versus what we saw in ‘07? I guess I just want to clarify.

Rick Puckett

Diane, what it really reflects is that if we were to buy everything we needed for 2008 at today’s prices...

Diane Geissler - Merrill Lynch

Okay.

Rick Puckett

...which we won’t, because we’ve already bought some at prices lower than today’s prices, it would be an impact as you say of 62 or $63 million.

Dave Singer

And that’s compared to the run rate in the first quarter. That’s not compared to what we paid on average for the year.

Rick Puckett

Right. That’s just what we are trying to show here is the significant impact that these rising cost have had since the first half of this year or the previous year 2007. So, we are not trying to suggest that we are going to have a cost overcome for 2008 of $63 million.

Diane Geissler - Merrill Lynch

Okay. And the 22 million that you called out in your press release, was that a gross number or was that net some efficiencies?

Rick Puckett

That was a gross number.

Diane Geissler - Merrill Lynch

Gross number, okay. And then, I had a question about, you mentioned in your prepared remarks that the top line, you are seeing of 15 million - little bit of a hit there because of a loss of a customer not from service, but from some decisions that were made at the customer about the category. Could you elaborate, I mean is it - they are devoting more space to it? Is it in mass? Is it in traditional, the C-store? I mean can you just give us a little bit more in detail on what’s going on there?

Rick Puckett

Sure. I mean part of that is in fact one of our larger customers have made some decisions around how they are going to manage the cracker category and as a result of that, some of our private branded crackers will disappear. On the other side, there is some contract manufacturing revenue that we will not see, as the manufacturer has made some decisions around the manufacturing of their product in the future. So, it’s split between the two, but -

Diane Geissler - Merrill Lynch

Okay. But on the branded side, is it just they have decided to devote less space in the oil to crackers?

Rick Puckett

It’s not branded at all, it’s only in non-branded.

Dave Singer

It’s split between contract production and private brands. It’s not - it’s all in non-branded.

Diane Geissler - Merrill Lynch

It’s all in non-branded. Okay.

Rick Puckett

Yes.

Diane Geissler - Merrill Lynch

Okay. And was it in your particular channel? Can you tell us the channel it was in?

Rick Puckett

We will just say it’s one of our larger customers, and we will leave it there.

Diane Geissler - Merrill Lynch

Okay. And then, I guess returning to the slides, where you talked about the underlying earnings power, I have sort of been asking this question on and off here for the past I think probably four quarters about can you give us some idea about, ex all the commodity head winds et cetera, where you think your earnings base should be with all of the efficiencies et cetera? I am not sure if you are in that position yet to comment on that, but that sure would be helpful for us I think. We are kind of looking at your company from the outside so to understand, the dollar impact of all these things that you’ve done on the supply chain and through distribution et cetera.

Dave Singer

Well, I think that there is different ways to look at it. One, we’ve done projections and we’ve got models that we’ve build taking into consideration all the things we anticipate. But one of the things we anticipate getting our margins correct - improve is as we do all the things we are doing, we layer on acquisitions that are appropriate and accretive and leverage the things that we have done.

With all of those things, we anticipate a margin in 2010 or so, that is significantly higher than we have historically run. Without them, it will be higher, but not as much higher and we are really not comfortable providing a specific estimate at this point. So, I know that’s a little frustrating, but, we have not.

Diane Geissler - Merrill Lynch

But you were just - it would just help to know what this all adds up to in terms of what you’ve done, even if you are not saying, our target is whatever, 10% or whatever number it might be?

Dave Singer

Well, I think that the issue is, it’s a little bit hard to tell one of the key drivers will be how successful are we in our acquisition program. How much will add, because frankly, we have build an organization that is much larger than it needs to be to support the business we have. If we didn’t plan on having some acquisition-based growth, our margins would be better than they are today, because we wouldn’t have as much as infrastructure as we have been investing in, in terms of people and processes. So, it’s really a hard question to answer. I am sorry I am not trying to be obtuse.

Rick Puckett

I mean our goals and our objectives here and the reason a lot of us came here to help effect the turnaround is in fact that we believe we can drive the top line and the bottom line, increasing that more than where it is today. And we have some objectives in mind and some points of celebration, but to Dave’s point, there is a lot of variables that will impact the ultimate outcome.

Diane Geissler - Merrill Lynch

And then just one quick detail question here. Your tax rate in the fourth quarter and it’s kind of lower than what I have been looking for. Is there anything going on there?

Rick Puckett

The only thing Diane that was reflected in the fourth quarter was simply a full year adjustment of the effective tax rate we have reported and there were some expiration of certain tax items that allowed us to make that adjustment in the fourth quarter and not before. So had we, I mean we sorted it. We sort of knew where our tax rate was going to come out sort of in the second and the third quarter, but we couldn’t book it yet, because of some FIN 48 issues.

Diane Geissler - Merrill Lynch

Okay. Would you expect your tax rate to be kind of in line with what it was in ‘07 and ‘08?

Rick Puckett

In ‘08?

Diane Geissler - Merrill Lynch

Or is it going to be -

Rick Puckett

Yeah, I think it’s probably going to be closer to 35.5 to 36 number.

Diane Geissler - Merrill Lynch

Okay. All right, perfect. Thank you.

Dave Singer

Thank you.

Operator

Your next question comes from the line of David Leibowitz with Burnham.

David Leibowitz - Burnham

Good morning.

Dave Singer

Good morning.

David Leibowitz - Burnham

What are your expenditures on new product introductions this year vis-à-vis a year ago?

Dave Singer

We really had relatively nominal expenditures for new product introduction. We have not done a significant amount of new product introduction. So, it’s not a material number.

David Leibowitz - Burnham

Okay. And are slotting fees higher this year than a year ago?

Dave Singer

There is no material change in our ‘07 versus ‘06 in that area.

Rick Puckett

David, one of the objectives for 2008 and we made some of this happen in 2007 by bringing in someone from the outside from the Kellogg’s organization actually to help us with innovation and new products. So, we’ve recognized that as one of our items of attention and we are going to be driving that through 2008.

David Leibowitz - Burnham

And some consumer goods companies have changed sizes of packaging to in some ways mitigate price increases or get extra new SKUs in to customers who will not pay more for old SKUs. Has that been the case with your experience as well?

Dave Singer

We have in our 2008 projections and guidance, we don’t have any real change in package configurations built into that. We are looking hard at the benefits of package changes particularly in the branded area for our second - if we need a second round. In the private brands area, we were looking at that very hard and then ultimately that’s not the way it broke, and we ended up just taking regular price increases.

David Leibowitz - Burnham

And lastly, in terms of the quarters as we go forward, is there any chance that the first quarter could be little better than breakeven? You seem to be hedging very greatly as to the outlook for the first quarter.

Rick Puckett

Well, we don’t provide quarterly guidance. So, we will just stick with our full year guidance on that one and the comments we have made about first half and second half.

David Leibowitz - Burnham

Okay. Thank you very much.

Operator

Your next question comes from the line of Terry O’Connor with Cedar Creek Management.

Terry O’Connor - Cedar Creek Management

Hi guys. Most of my questions have been answered. I will ask just, you inherited a dividend policy here that honestly that kind of looks high relative to what you are earning at the moment in maybe the first half numbers this year and you are talking about maybe going into debt to make acquisitions. Have you reexamined your dividend policy in light of your growth plan and the current volatility in the commodity’s markets?

Dave Singer

Yeah. The Board discusses that every quarter. We understand that it provides a significant cushion, at some point in the future, if opportunities come at a rate that exceeds our interest in leveraging. But, when you look at our debt-to-EBITDA ratio, it’s very low and we are comfortable that we can maintain a dividend in the near-term, but we do consider that every quarter.

Terry O’Connor - Cedar Creek Management

Thank you very much.

Operator

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

Heather Jones - BB&T Capital Management

Thanks. I will try to make this quick. First, how much did diesel hit you for the quarter?

Dave Singer

I don’t have it off the top of my head, but I think it was relatively minor because we’ve hedged most of that in 2007.

Heather Jones - BB&T Capital Management

Okay. And you spoke about you’ve hedged some of your commodities more first half than in the second half. Can you give us a rough approximation of how much you have hedged for the first half?

Dave Singer

It’s different by item and -

Heather Jones - BB&T Capital Management

I guess wheat and soybean oil I would be most interested in.

Dave Singer

Yeah. I don’t know that that’s something that we are really comfortable getting too specific with.

Rick Puckett

Right.

Heather Jones - BB&T Capital Management

Well, I guess another way to phrase it is, have you hedged so much that even if these cost come down significantly in the first half, it’s not going to help you?

Rick Puckett

No.

Heather Jones - BB&T Capital Management

Or you do have more exposure?

Dave Singer

If they come down significantly in the first half, we’ll get some benefit. But we will get much more benefit in the second half.

Heather Jones - BB&T Capital Management

Okay. And then my final question is, I am not asking you all to make a call on where you think commodities are going, but I personally believe that wheat is going to come down this year. Given your 70 to $0.80 and you haven’t hedged all of it, is it fair to say that there is upside to that, if wheat does in fact come down? And I know I’m not talking about $0.50 but I’m talking $1 to $2 a bushel. Is there upside to that number?

Dave Singer

Well, if wheat comes down and we have been effective in putting our price increases through, and the market is such that our competitors and our customers don’t drive pricing down. Sure, there would be the same kind of upside as there was downside when it went the other way.

Rick Puckett

I mean it gets us closer back to our margins.

Heather Jones - BB&T Capital Management

Okay. Well, I just, that’s the way my thinking was working, but I just wanted to make sure there wasn’t anything I was missing.

Dave Singer

No, I don’t think so.

Heather Jones - BB&T Capital Management

Okay. Thanks.

Operator

Your next question comes from the line of Margot Murtaugh with Snyder Capital.

Margot Murtaugh - Snyder Capital

Thank you very much. I just wondered what was the price increase in the first quarter for the branded business across all your lines. And -

Dave Singer

Yeah. I don’t know that we- we don’t publish that specifically, but what we did say was, the range is between about 3 and 7.5 or 8% is the range across our product lines.

Rick Puckett

That’s price increases. She is -

Dave Singer

I am sorry.

Rick Puckett

She is asking about the wheat pricing. We don’t specifically disclose what price we pay for wheat.

Margot Murtaugh - Snyder Capital

What percentage of cost of goods is commodities in the branded business?

Rick Puckett

Well, across all of our business, we are at about 40% or so on commodities maybe 45%, but we don’t disclose private versus - sorry, non-branded versus branded.

Margot Murtaugh - Snyder Capital

Okay. And what will your D&A be this year, you said, it’s going up?

Rick Puckett

It is. It’s going to be about $34 million approximately.

Margot Murtaugh - Snyder Capital

Okay. And you said the CapEx is going to remain higher this year, but then tail-off in 2009, did you say?

Rick Puckett

We did not say that but, what we are trying to do is continue to invest in the infrastructure of the company and I think, as we approach 2009 and latter years, we will come back more towards to a norm given the type of company we are and the industry we are in.

Margot Murtaugh - Snyder Capital

Okay.

Dave Singer

Yeah. I think what we did say is there was kind of a three-year period, six, seven and eight where it was higher than it would be on an ongoing basis, but we haven’t given a projection for ‘09 at this point.

Margot Murtaugh - Snyder Capital

All right. And what is your capacity for acquisitions? I mean what do you feel comfortable with on your debt-to-EBITDA ratio?

Rick Puckett

Well, certainly higher than point six is a good thing. But, I think that as it approaches 2.5 and 3, even a little bit higher in the short term.

Margot Murtaugh - Snyder Capital

Okay. Now you said you are building an infrastructure for a much larger company. Do you give any - what kind of sales can your infrastructure handle? Can you -

Dave Singer

Well, it depends on which part of it we are talking about. I think if you are looking at the management team, it can handle a company three times the size or more pretty easily. If you are looking at the production capacity, it depends on the specific type of business. So, it’s different across the board. But, when you look at our financial capacity, there is a variety of different ways to look at it. But we are focused on becoming a much larger business over the next three to five years.

Margot Murtaugh - Snyder Capital

Okay. When did you start thinking about becoming a larger business? Is that a function of - you just - you made the Tom’s from excess capacity?

Dave Singer

No. Actually, that really was part of when the management, the Board changed management in the middle of 2005. And really, the goal from that point forward was to turn this business around, attract a team to take it to the next level, which included an acquisition program. So, that really started from the beginning.

Margot Murtaugh - Snyder Capital

So, it started from the beginning, okay. All right, thank you very much.

Dave Singer

You are welcome.

Russell Allen

Dave, I see at this time, we have no more questions from investors.

Dave Singer

Okay. Thank you all for coming, and we will talk to you next quarter.

Operator

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

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