Snyder's-Lance Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Snyder's-Lance, Inc. (LNCE)
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Snyder's-Lance (NASDAQ:LNCE) Q3 2013 Earnings Call November 7, 2013 10:00 AM ET

Executives

Mark Carter - Vice President and Investor Relations Officer

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

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

Analysts

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

Thilo Wrede - Jefferies LLC, Research Division

Rohini Nair - Deutsche Bank AG, Research Division

Sarah Miller

Operator

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

Mark Carter

Thank you very much, Rob, and good morning, everyone. With me today are Carl Lee, President and Chief Executive Officer; as well as Rick Puckett, Executive Vice President and Chief Financial Officer of Snyder's-Lance Inc. During today's call, we will discuss our 2013 third quarter results, as well as estimates for the full year. As a reminder, we are webcasting this conference call, including the supporting slide presentation, on our website at www.snyderslance.com.

Before we begin, I'd like to point out that during today's presentations, management may make forward-looking statements about our company's performance. Please refer to the safe harbor language that's included in each of our presentations. I'll now turn the call over to Carl Lee, President and Chief Executive Officer, to begin management's comments.

Carl E. Lee

Thank you, mark. Good morning, everyone, and thank you for joining our conference call. Today, we're going to review a number of slides that have been made available online as we discuss our 2013 third quarter results and the progress we're making against our strategic priorities.

If you're following along with the slides, I invite you to turn to Slide #4. We'll begin by reviewing just our overall third quarter review. Our team delivered 11.4% revenue growth, driven by our core brands. Our Q3 sales and volume growth rates were higher than Q2 due to strong retail execution, marketing support and product news. Considering our positive volume growth for the quarter, we are outpacing the trends you see across the food industry. On a year-to-date basis, we have achieved market share gains with the support of increased advertising, social media campaigns and our Q3 movie tie-in promotion. We have also posted distribution gains for our quarter -- for our core brands on a year-to-date basis, leveraging our DSD network and the efforts of our direct sales team.

Our Private Brand business is doing well when you look across the strong underlying sales growth of our large and diverse customer base. Our revenue is growing ahead of the category across most of our customers with the exception of a couple of them that have had difficulty with their packaging changes, or promotional challenges that are being addressed.

In the third quarter, we were able to improve our gross margin by over 100 basis points year-over-year on a higher mix of branded products and cost control across the organization. We launched several major initiatives to support our IBOs, as we celebrate the first anniversary of our DSD transformation. We improved the incentives, selling tools, information availability and customer service so that they can take even better care of our retailers. We're very proud of our IBO partners and are working hard to help them develop their independent businesses.

We are pleased with our EPS performance in the third quarter, and we're proud of the progress we have made in 2013. Our EPS of $0.84 year-to-date compares to $0.66 last year for 27% growth.

Now if you'll join me and turn to Page 5, we'll talk about Pretzel Crisps. We're selling our -- celebrating our first year anniversary with Snack Factory and are very proud of our team's continued success in driving the exciting results on this incredible brand. Snack Factory had a solid quarter, with very strong growth on a year-over-year basis. Our team has delivered strong market share gains for the quarter and year-to-date, driven by higher velocity or turnover at the point-of-sale. Our distribution and ACV coverage is up double digits as we expand our store level authorizations, assortment, and number of retailers carrying our products.

We're excited about serving our daily managers and see long-term growth potential as consumers continue to focus more and more on convenience. It's great to be outpacing the Deli category by just showing very strong growth trends. We have expanded our team this past year as we activated new markets. We have added sales and local marketing team members in a number of key markets and will continue to do so next year to further drive our ACV and distribution.

Now let's turn to Slide #6. On a full year basis, we've seen positive distribution gains and retail price movement across our 4 core brands. As a result, our core brand revenue was up over 20% to prior year. Market share numbers for each of our core brands is up for 2013. As mentioned earlier, we delivered a positive volume growth as our brands grew faster than their respective categories.

Allied brands grew around 2% for the quarter year-over-year, which is a strong statement of our team effort to improve margins while repositioning these brands to be more competitive in the marketplace.

As an important part of our plans going forward, we are focused on product news, distribution and leveraging our DSD system to avoid the discounting that our competitors may pursue. With that in mind, during Q3, we announced to our retail partners a number of new innovative products for 2014. We believe this is one of the most exciting new product offerings that we've been able to bring to market in some time, and they are very much on-trend and up-to-date with recent consumer expectations.

I've shared with you just a few examples, as we turn to Page 7. We will begin with Snyder's of Hanover. We have a number of new offerings, including an expanded lineup of gluten-free pretzels we are launching actually this quarter, including 2 new season gluten-free products that are going to be a hit with consumers who want great taste and exciting flavors. In addition, we have a variety of new products underway for 2014 to support our fast-growing pretzel pizzas line. For example, we are going to have a new offering of spicy pretzels that deliver unique crunch and texture, along with a sweet line to satisfy consumers' desire for great snacking. We have several other new products on deck for SOH that we'll be introducing in the coming months.

Now focusing on Lance. We are beginning to roll out our improved graphics on our Home Pack line of products, contemporizing the look and feel of our product with our new closed-carton packaging. Our new line of highly flavored sandwich cracker for 2014 have been met with very positive reception from our retailers and is expected to reach new consumers that prefer spicier and bolder flavors.

Cape Cod is seeing innovation in both packaging and product offering for 2014. First, we're expanding our very successful Waffle Cut line with new flavors and packaging enhancements to call out attention to this highly differentiated product.

Lastly, we are introducing new popcorn items in the Cape Cod line to respond to consumer request and a very favorable category dynamics.

And Pretzel Crisps, our fast-growing line will be introducing 2 new flavors this coming year that complement the already exciting items that we have in the deli section. Additionally, we have plans to expand our enrolled [ph] product line as well. Pretzel Crisps is growing at a great rate, so it's exciting to see how Snack Factory team continues to expand their very successful line.

Now turning to Page 8 and reviewing our advertising and marketing plans. As you know, we've stepped up our advertising and marketing dollars for 2013. At the same time, we refined our approach. We are targeting our efforts for each of our core brands in a way that best resonates with current and future consumers.

As an example, we've had very positive reception with Snyder's of Hanover flavored pretzel piece television campaign that's been running throughout this summer. Our Lance and Pretzel Crisps brands have been responding positively to interactive digital marketing and our mobile snack patrols. Our marketing and advertising plans are supported by innovative in-store activities that allow our consumers to sample our products and driving great results in trial.

Now turning to Page 9, and looking forward. We're driving to finish 2013 with solid full year EPS performance as we begin rolling out our new initiatives for 2014. Our focus continues to be on emphasizing core brands and widening our margins across all product lines. We are working hard to drive our top line growth with product news, innovative new items and distribution gains to avoid the industry's potential temptation of discounting.

Additionally, we continue to grow our IBO base distribution network and have recently acquired additional routes in some very important key geographies. We continue to look -- and we also continue to look for opportunities that fit our strategic plan to expand our DSD network, our core brands and manufacturing capabilities.

Snyder's-Lance is making progress on a number of fronts, and I want to thank everyone involved, especially our associates, for their hard work and dedication that drives this great company on a daily basis.

At this time, I'd like to turn it over to Rick Puckett.

Rick D. Puckett

Thank you very much, Carl, and good morning, everyone. Let's go to Page 11 in the deck that was posted earlier this morning. It will show a -- which shows a breakout of our net revenue for the third quarter. Branded revenue was up 15%, and core brands were up 20%, as Carl mentioned a few minutes ago. Excluding pricing and acquisitions, core Branded volume was up about 3% for the quarter. As Carl mentioned, we had market share and distribution gains in each of the core brands in the quarter. Private brands revenue, while down, was impacted primarily by continued slower growth in a couple of our customers. Our Partner brands are up as other manufacturers begin to utilize our national distribution networks.

On Page 12, you'll see the full year -- or sorry, the year-to-date summary of revenue, a similar picture with Branded revenue up versus last year of 14%, and core brands actually were up 21%. You can also see partner brands up there as well, as we continue to use our distribution system to make more efficient use by distributing other manufacturing products.

On Page 13, you'll see the third quarter financial statistics. Gross margin was 34.8% versus 33% last year, up about 110 basis points, driven primarily by better branded mix and lower manufacturing cost. The operating margins were at 7.9% versus 7.8% last year. This quarter included higher marketing and advertising investments of approximately 70 basis points. As you know, we have stated that we intend to reinvest back into long-term loyalty activities through advertising on our core brands. Significant TV advertising for Snyder's of Hanover pretzels occurred during the quarter with correspondingly good lift.

In addition, we find that our social media and other online activities are demonstrating good results for some of the other core brands instead of TV advertising. This is also a more efficient spend.

You might have noticed that our tax rate was higher at 38.3% versus 35% last year. It is possible that the full year tax rate will be closer to 35%, as I've guided up to this point versus our current rate of almost 38%. I will say that our -- we have revised EPS guidance, which I'll talk to in a minute, to reflect the higher, more conservative position.

A reduction could result from potential changes in timing in our expectations to certain full year tax items in the fourth quarter. Other income included an anticipated settlement of an insurance claim related to lost revenue and profit from earlier in the year and was originally included in the guidance for the year. Netting the insurance claim and the higher tax rate resulted in a pickup of approximately $0.015 to $0.02 in earnings per share for the quarter.

Page 14. Looking at year-to-date activity, revenue was up 9.3%. Gross margin is up 120 basis points. We see an improvement of 100 basis points in operating income and a 27% increase in diluted EPS.

Let's look at cash flow on Page 15. Free cash flow was approximately $33 million for the last 4 quarters. This is compared to last year's $38 million. Cash from operations is up approximately $9 million over last year, despite higher working capital this year and specifically, the inventories that are supporting our increased holiday activity this year. We do expect to realize significant inventory reductions by year end as we sell through this holiday inventory. Last year's numbers also included a tax refund of approximately $13 million.

CapEx is up $14 million on a trailing 12-month basis, but for the year of 2013, we do expect to spend approximately $5 million to $7 million less capital when compared to last year.

Turning to our guidance and our revised estimates. We are changing our net revenue guidance to reflect the trends we continue to see in the industry. We now estimate net revenue to grow by 9% to 10% for the year. EPS guidance is being adjusted entirely from the impact of the expected tax rate, as I mentioned before. There is a chance that the tax rate will still fall to approximately 35% or slightly less, which is consistent with prior years, but we have reflected a more conservative view in our revised guidance this quarter. This difference is actually worth approximately $0.03 to $0.04 in EPS.

Continued cost controls and efficiencies will help offset the revenue trends. We've also reduced the CapEx guidance to $73 million to $75 million for the year, which is reflecting the timing of major products -- I'm sorry, major projects that are going on. At this time, I'd turn it back over to Rob for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brett Hundley from BB&T Capital Markets.

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

I have a kind of a detail-ish question to start. Carl, you mentioned the new gluten-free packaged products shipping this quarter. What aisle will that actually be placed in?

Carl E. Lee

Very good question. I appreciate it, and I hope you're doing well today. We're excited about it because we will put it -- primarily put it in the gluten-free sections in stores. A lot of our retailers have set up a dedicated section for gluten-free products, and it offers a comprehensive variety of products basically that everyone that someone who wants to shop in the section can find. So that's our primary placement. But in a few cases where those don't exist, we may put it in our section. And as you noticed the packaging, that bright yellow color with the new package design, it will really stand out in our section as well. So that's basically where we're going to merchandise it. First, in the gluten-free dedicated sections, if possible. And as a fallback plan of our sections, we made sure the packaging would stand out. We've got 2 gluten-free items out there now that have done phenomenally well this year and adding these 2 new ones and then updating our packaging. We expect to continue to see some tremendous growth as more and more people include that in their diet.

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

And your core Branded growth outside M&A pricing was -- it looks like it was pretty much in line sequentially, and it has been talked about ad nauseum, the current market environment. I'm curious if you guys would give some commentary on the competitive landscape across your different categories, and if you expect to be impacted any differently in your specific categories going forward.

Carl E. Lee

Well, what we tried to cover in our opening remarks was, I mean, you saw the emphasis on new products, you saw the emphasis on our marketing campaigns. We're going to do our very best to leverage those because we think that our consumer still want to buy excitement, they want to buy news, they want to buy quality and value. And so we're going to do our best to avoid the temptation that others may have, and that's discounting. But the quality of our products and the great reach of our brands, that's going to continue to be our focus. So we're just going to watch the categories very carefully. We're going to play defensive ball as much as we can, and launching things like gluten-free pretzels during Q4 is a good way for us to kind of be aggressive with Snyder's versus maybe following temptations that may be more widely spread throughout the industry.

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

Do you think that if some categories do become more price-competitive, do you feel that your earnings guidance range accounts for any potential behavior there?

Rick D. Puckett

Brett, this is Rick. Yes, we have taken that into consideration in our guidance projections.

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

I appreciate it. And then just my last one is on Snack Factory. Can you talk a little bit about the growth that, that company is seeing with its Pretzel Crisps brand? And particularly, I'm interested in ACV growth versus velocity. And if you can just give some qualitative color there, it'd be helpful, and I appreciate the questions, guys.

Carl E. Lee

Brett, I appreciate the question. I think that the answer, without going into a lot of detail, I mean, to your point, we monitor a couple of key things as we look at brand performance. But first and foremost is just the overall growth year-over-year. But then as we peel it back, we do look at ACV growth and we've seen that up dramatically year-to-date. We begin to look at pricing, and that's headed in the right direction. We look at promotional activity. That's clearly headed in the right direction along with display coverage. And then more importantly, as you're expanding distribution and your display coverage, are you actually increasing velocity, and we've seen that go up as well. So kind of all 4 of the key dynamics that we track are leading to very strong market share gains in a very fast-paced category. So it's pretty much across the board, a very good foundation of continued growth for one of our exciting new brands.

Operator

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

Thilo Wrede - Jefferies LLC, Research Division

Carl, I appreciate your intention to avoid the temptation of discounting. And I think that's a sentiment that quite a few of your peers have voiced over the last few weeks or months as well. My question though is if volumes continue to be weak, if retail traffic continues to be weak, if potentially, traffic from -- if pressure from retailers increases to maybe invest more products and if one of your competitors starts losing that steadfastness and starts promoting more, how do you avoid not participating in that as well?

Carl E. Lee

Again, that's the key question of the day, and it's going to be asked over and over across the entire food industry. I think that being proactive is we're trying to do is the key. Brett asked about our gluten-free pretzels. That's a great initiative to support our pretzel initiatives. We're rolling out a new 20-count, large family-size of our sandwich crackers, so we're improving value by offering more in a box. So it kind of improves our price point, but improves our value, improves our overall sell-through. So we're taking as many initiatives like that as possible to continue to try to be moving forward with maintaining our margins, maintaining our volume, but doing it again with a little bit of creativity and value versus trying to do it with price. I can't tell you exactly what our competitors are going to do, but we've got a proactive plan, and we're going to stick to it.

Thilo Wrede - Jefferies LLC, Research Division

You're going to stick to it no matter what the competition is doing?

Carl E. Lee

I think let's wait and see what comes. There's no need to kind of fear, fear itself, but I think that so far, we have not necessarily seen a lot of pickup in salty snacks, and the cracker aisle is pretty much about what it was before. And so we'll get our new initiatives out for Q4 because we were a little proactive for that. We'll get some additional new products out for Q1, and we'll have our sales team very busy with their retail executions supporting our product news.

Thilo Wrede - Jefferies LLC, Research Division

Okay. The other question I had was the -- was around the Quitos product that you highlighted on the innovation slide. I think it's an interesting product, and I think it's a growing category with the rolled tortilla product. My question, though, is a lot of large packaged-food companies have avoided over the last decade to introduce actually new brands. This is the new brand for you. What gives you the -- what's your level of confidence that you can grow this, that you can establish a new brand in this very competitive space?

Carl E. Lee

I'll be glad to address that. I think, if you take a look at the product itself, it's high-quality, high-value product with the rolled tortilla chip, but it's much bigger than just rolled tortilla chip. There's some very important core [ph] growing products in there as well and some corn-based products that gives us a bit of variety. The key there is this is going to be a pretty much up-and-down-the-street type item. You'll see it in our C stores. And so there, you have a very high impulse channel, not quite as price-sensitive, and we've got a great DSD organization to back it up. So if you put our retail muscle behind it in a high-volume, high velocity channel and focus more on those where you kind of have a good push strategy, we feel very comfortable. So we've got some sampling going on, some trial going on, some marketing support, so we're going to drive awareness, but then we've got the power of our DSD system behind it to push it. And by focusing on the up-and-down the street channel, C stores, small mom-and-pops, I think we're going to be in good position to drive some trial.

Operator

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

Rohini Nair - Deutsche Bank AG, Research Division

So I had a question about growth on your core brands. So I know in the past, you had talked about kind of long-term 3% to 5% top line growth, maybe even a little bit better than that when you add in Pretzel Crisps, which has been going a little faster than your other 3 core brands. So given the current industry environment, the general weakness you've been seeing in the categories, volumes disappearing to some extent, do you think it's likely you'll come in below those long-term expectations, looking out to 2014?

Rick D. Puckett

I will start that, and I'll let Carl add to it because he's already started kind of emphasizing where we're going to focus as it relates to driving that growth, which is, in fact, a higher innovation pipeline. And we've invested significant resources and bringing in new marketing talent, new innovation talent, invested, as you know, in an R&D center to help drive new platforms for growth. And we've been -- we're very excited, as Carl mentioned, about what's coming out next year. So we still feel comfortable with that 3% to 5% long-term on an organic basis. We're not that far away from it this year, quite honestly, even with the kind of the consumer issues that we have been seeing across the industry. Carl, you might want to add?

Carl E. Lee

No, I think that -- and I think again, we're just trying to be out in front of it as much as possible. I think we're dealing with a very high-impulse category, and one that's driven by quality and value. Price is always a component for any category. But if you're trying to stay out in front of it, with product news and then on marketing campaigns, I think we're going to be in good shape as we continue to move forward, kind of just executing our strategy. And I think going back to when we actually put these 2 companies together, back a couple of years ago, one of the big drivers of that was the ability to use our national distribution system to continue to drive ACV, and there's still ACV to be gained. So there's growth opportunities for us in distribution, there's growth opportunities for us in velocity, as well as our enhanced marketing skills and advertising skills, as well as the pipeline of new products. So we're pretty excited.

Rohini Nair - Deutsche Bank AG, Research Division

Just one more. A lot of the companies we've been talking to have been alluding to maybe a more benign input cost environment, even deflation in some cases. Can you give us a sense of your commodity cost outlook going forward and whether you're seeing something similar?

Operator

Ladies and gentlemen, please stand by while we reconnect your speakers. [Technical Difficulty]

Carl E. Lee

Rohini, I apologize for that. We dropped off, and what was your question? We are seeing, obviously, some moderation in prices on commodities, and especially going into next year. As you know, we're 6 months out typically on our major commodities anyway. So there's a little bit of tailwind, I would say. I wouldn't say it's so dramatic that it's as significant as you might have heard from other places. Whatever we have, we're certainly going to reinvest into continuing to invest in advertising and marketing on our long-term loyalty plans.

Operator

[Operator Instructions] Your next question comes from Bill Chappell from SunTrust.

Sarah Miller

This is Sarah Miller, on for Bill. First question would be, can you kind of talk about the timing of your new product launches for both Quitos and Lance food and then kind of into some of your other lines?

Carl E. Lee

Yes, we'll be glad to. I think the Quitos, we started rolling out this summer. So it's been a gradual lower rollout. And with the up-and-down the street channel, you can kind of start midyear and then work your way through your retailer base. The Lance sandwich crackers you referred to, those will be coming out early 2014. And so we've got kind of a wide range of products coming out at different times, gluten-free pretzels hit this quarter. There's some new SOH product news coming out in Q1. So it's pretty much spread out with probably the majority of it coming out early '14, but some of it leaking into the market even now.

Sarah Miller

Okay, great. And then the other question would be, I guess on some of the Private Brand weakness, you talked about the packaging changes that some other retailers had. Can you quantify the effect that that had on the sales number in the quarter?

Rick D. Puckett

I think the way we would quantify that is Private brands would've been up had it not been for those issues.

Operator

There are no further questions at this time. I'll turn the call back over to Carl Lee, Chief Executive Officer, for closing remarks.

Carl E. Lee

We're just very grateful for everyone who joined us this morning. We appreciate the time we spent together. We're very pleased with our Q3 results. Our team is working very hard to continue to build our business and build it with product news and innovation and marketing. And I'm very pleased and very blessed with a great team that we're working with day-in and day-out, and we're excited about the future. So we wish everybody a very good day, and thanks for sharing your valuable time. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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