Snyder's-Lance (LNCE) Q2 2017 Results - Earnings Call Transcript

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About: Snyder's-Lance, Inc. (LNCE)
by: SA Transcripts

Snyder's-Lance, Inc. (NASDAQ:LNCE) Q2 2017 Earnings Call August 8, 2017 10:00 AM ET

Executives

Kevin Powers - Snyder's-Lance, Inc.

Brian J. Driscoll - Snyder's-Lance, Inc.

Alexander W. Pease - Snyder's-Lance, Inc.

Analysts

Steven Strycula - UBS Securities LLC

Rob Dickerson - Deutsche Bank Securities, Inc.

Akshay Jagdale - Jefferies LLC

Amit Sharma - BMO Capital Markets (United States)

David Mandel - Consumer Edge Research LLC

Brett Hundley - Vertical Trading Group LLC

Michael W. Gallo - C.L. King & Associates, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference Mr. Kevin Powers, Senior Director of Investor Relations. Sir, please go ahead.

Kevin Powers - Snyder's-Lance, Inc.

Thank you, operator, and good morning, everyone. With me today are Brian Driscoll, President and Chief Executive Officer; and Alex Pease, Executive Vice President and Chief Financial Officer.

During today's call, we will discuss our second quarter results, revised outlook for fiscal 2017 and provide further details on our multi-year performance transformation plan that was outlined in our press release this morning. As a reminder, we are webcasting this conference call under the Investor Relations section of our corporate website at snyderslance.com.

During today's presentation, management may make forward-looking statements about our company's performance. Actual results could differ materially from those described in the forward-looking statements. The company undertakes no obligation to update forward-looking statements. A reconciliation of GAAP results to non-GAAP financial measures is available in our earnings release, which is posted on our website.

I'll now turn the call over to Brian Driscoll, our President and CEO. Brian?

Brian J. Driscoll - Snyder's-Lance, Inc.

Thanks, Kevin; and good morning, everyone. We appreciate you joining our second quarter earnings conference call. This morning, I will focus my comments on three areas. First, a brief overview of our second quarter performance; second, an outline of our performance transformation plan; and third, the 2020 financial targets we provided in our press release this morning. I will then be followed by Alex who will review our Q2 performance and discuss our revised full-year outlook.

This morning we reported second quarter results that were slightly stronger than our expectations. Importantly, our bottom line has stabilized and our top line momentum continued. Total net revenue increased 3.3% fueled by Core Brand growth of 4.7%. Our earnings results were in line with last year as we delivered operating margin of 9%, adjusted EPS of $0.27 and adjusted EBITDA of approximately $77 million. These results reflect continued strong branded growth in what has been a relatively soft consumption environment.

In the 13-week IRI MULO period ending July 9, six of our eight U.S. Core Brands gained market share. Let me take a moment to provide some additional context. In the 13-week period I referenced, we experienced good market share performance on our potato chip brands as both Cape Cod and Kettle Brand each gained share in the quarter through a mix of well-executed promotional activity, distribution gains and improved base business trends on core SKUs. Cape Cod Chips gained 2.3 share points with retail sales increasing by 1.4%, Kettle Brand gained approximately 2 share points with retail sales up 2%.

Lance sandwich crackers reached a 47% share of the sandwich cracker category, gaining 3 points versus a year ago with retail sales growing 4.5%. We're also encouraged by the momentum we are experiencing going into the critical back-to-school period and we'll benefit in the back half of the year from distribution gains at key retailers. In addition, consistent with our ambition to invest more in brand equity building activity, we are expanding our successful This is How We Sandwich campaign from digital, social and radio to television advertising for the first time. The campaign is airing in 15 of our strongest markets for eight weeks.

Moving on to Snack Factory and Late July, we had solid growth on both brands, driven by continued ACV growth and strong velocity gains. Snack Factory is the number one deli snack brand in the U.S. and is the number one contributor to the deli snack category growth. As a result of a strong 12% base velocity increase, the brand grew retail sales by 8.6% and share by 1.8 points. Late July has the number one and number two SKUs in the natural channel and remains the number one contributor to growth in the natural organic tortilla chip category in the grocery channel with retail sales up 36%. In the second quarter alone, we saw over 4 points of share growth in grocery.

For Snyder's of Hanover, retail sales and share were about flat versus prior year as we cycled the strong recovery in 2016. We remain encouraged by our brand renovation efforts and the continued success of the Pretzels, Baby campaign. Although the microwave popcorn category continued to decline in the latest 13 weeks, Pop Secret share was up approximately 80 basis points. The brand's best butter every product reformulation and packaging renovation started to roll out in early June and we have seen distribution gains as we rebuild from some of the losses we experienced a year ago.

While the category is still under pressure, we feel good about our progress to-date and improving outlook as we head into the peak seasonal months. While we're encouraged by our branded sales momentum, we are not satisfied with our aggregate financial performance and have finalized a broad-based performance transformation plan to sharply expand margins and unlock substantial value for shareholders. I have foreshadowed my early thinking in some of our most urgent priorities and prepared now to describe them in more detail.

Over the last several months, we've spent significant time diagnosing the root causes underlying our below-average margin performance and constructing an expansive profitability improvement plan designed to substantially improve operating margins and profitability over time. In that context, we recently announced a broad-based workforce realignment initiative, the closure of an underutilized manufacturing plant and the restructuring of our salesforce and commercial efforts under a single Chief Customer Officer. We have also formed a centralized R&D innovation and marketing service center of excellence as part of our realignment.

In addition, as we noted in a filing last week, we are planning to implement a new strategic business unit structure in fiscal 2018. This new structure is intended to raise the level of P&L ownership and accountability in the organization. We'll plan to share more details as the organization design unfolds.

These are significant steps, but only the beginning. Over the course of the next three-plus years, our team will focus on the following six levers to unlock approximately $175 million in operating profit improvement. Let me briefly describe each to provide a sense of both the work involved as well as the magnitude of the opportunity.

Beginning with SG&A efficiency, as we've mentioned before, we've recently undertaken the streamlining of the company's spans and layers and eliminating redundant positions across our locations. We intend to continue looking for opportunities as we streamline and automate our back-office processes and eliminate non-value-added work. In addition, we are rapidly ramping up our zero-based budgeting efforts.

Turning to manufacturing and supply chain productivity, we have begun to address our capacity utilization challenge with the announcement of the Perry plant closure. We also plan to aggressively advance our deployment of Lean manufacturing across our sites, put in more technology-based inventory and demand planning tools, drive procurement efficiencies and streamline logistics and transportation.

Taking portfolio optimization, price realization and marketing optimization together, we will remove complexity, improve mix through better assortment management, and improve promotional spend efficiency through more advanced analytics. For perspective, the team has identified close to 750 SKUs of our approximately 2,000 branded SKUs that can be eliminated in a three-year timeframe with what we believe will have a minimal impact to revenue and a positive effect on operating income.

Lastly, we believe there is significant upside working with our IBO partners to improve productivity and effectiveness through a combination of technology, enhanced analytics and other support. We believe this combined with our strong direct-to-warehouse capability will create a more efficient supply chain capable of better serving our customers.

From a timing standpoint, we kicked off our transformation effort with our announcement two weeks ago and we are targeting full plan completion by 2019, which will allow us to achieve the full benefits of the plan in 2020. In 2020, when the plan is complete, we anticipate operating margins to reach 14%, earnings per share to grow at a four-year CAGR of between 11% and 13% and to deliver $175 million in operating profit improvement. We expect the pacing of the margin expansion to be more back-end loaded. For the full year of 2018, we anticipate operating margin to exceed 10%, approaching low-teens in 2019 and reaching 14% in 2020.

Furthermore, our long-term revenue growth goal continues to be to outpace the categories we compete in. However, considering the impact from our SKU rationalization and trade effectiveness initiatives, we do anticipate growing modestly below category levels in the early stages of these initiatives.

In closing, I am excited about our future potential and look forward to sharing more as we continue on our journey.

And now, I'd like to turn the call over to Alex for more detail on the quarter and to review our financial outlook for 2017. Alex?

Alexander W. Pease - Snyder's-Lance, Inc.

Thanks, Brian; and good morning, everyone. Total second quarter revenue increased 3.3% to $579.6 million. Total branded revenue increased 4.9% to $463.9 million, while Partner Brand net revenue decreased 4.5% and contract manufacturing revenue increased 90 basis points. Partner Brand revenues continue to show softness as these key channel partners struggle in a challenging consumption environment. While we're taking steps to support these brands and reduce their dilutive effect on our overall performance, we're encouraged that our Core Brand portfolio is not being impacted by these consumption headwinds to the same degree.

Within our branded revenue category, Core Brands grew 4.7%, while our Allied Brands grew 6.6%. The Core Brand net revenue growth was led by Late July, Snack Factory, Lance, Snyder's of Hanover, Cape Cod, Pop Secret and Kettle Brand, all partially offset by a decline in KETTLE Chips.

Turning to operating income. Second quarter operating income, excluding special items, increased 4.1% to $52.3 million, or 9% of net revenue, as compared to $50.2 million, or 8.9% of net revenue in the same period last year. The modest operating margin expansion was the result of lower general and administrative expenses, strong mix of branded sales and supply chain productivity and cost initiatives.

These were partially offset by higher service and distribution costs, higher cost of sales related to new product introductions and higher costs related to poor quality potato crop, which reduced yield. The tax rate in the second quarter, excluding special items was 36.2% as compared to 35.2% last year. The increase in the tax rate was primarily due to a reduction in operating income from our UK operations. Adjusted EBITDA increased 1.4% to $76.8 million or 13.2% of revenue. GAAP net income was $4.3 million or $0.04 a share and net income excluding special items was $26.8 million or $0.27 per share.

In the quarter, we incurred special charges of $29.8 million affecting GAAP comparability. These were primarily related to severance and impairment charges as part of our transformation plan and the relocation of Emerald production from the Stockton facility to our new manufacturing plant in Charlotte.

Turning to cash flow. We generated $52.4 million of free cash flow in the six-month period ended July 1, 2017, as compared to $45.5 million in the same period of last year. This includes $87 million of cash from operations and nets out $34.7 million in capital expenditures largely related to growth investments. In addition, our leverage remained consistent at approximately 4.0 times at the end of the second quarter. We continue to anticipate reducing leverage to approximately 3.5 times by the end of 2017.

Now let's move to our full-year outlook. Based on our first half results, expectations for the remainder of the year and expected benefits from the early and future actions we are taking as part of our performance transformation plan, we're updating our full year 2017 guidance. For 2017, we continue to expect to generate revenue in the range of $2.2 billion to $2.25 billion. We're now raising our expectations for earnings per share guidance, excluding special items from $1.05 to $1.20, up to $1.10 to $1.20, and adjusted EBITDA from the initial range of $290 million to $315 million upwards to $300 million to $325 million.

I'd like to note that included in our revised earnings outlook are a few partially offsetting headwinds. These include higher-than-expected net interest expense, effective income tax rate and early transformation plan investments. For the full year, we now expect net interest expense of $37 million to $40 million and the effective income tax rate to be between 35.5% and 36.5%. The interest expense increase is due to our revised forward LIBOR curve assumptions and the tax rate increase is largely due to our revised outlook for our UK operations profitability.

Finally, additional assumptions for the full year include capital expenditure in the range of $75 million to $85 million and a weighted average diluted share count of approximately 98 million shares.

Before I turn the call over to the operator to begin Q&A, I'd like to remind everyone of our Investor Day in New York on September 28 where we'll provide greater detail on the specific activities that will be driving the transformation plan as well as introducing you to the broader management team. If you haven't received the save-the-date and are interested in joining, please feel free to contact Kevin directly.

Now, operator, I'd like to open the line up for questions.

Question-and-Answer Session

Operator

Our first question comes from the line of Steven Strycula from UBS. Your line is open.

Steven Strycula - UBS Securities LLC

Hi, guys, and congratulations to Brian for getting back in the saddle. So quick question would be a clarification on the 2020 guidance, if we were to run through a 14% operating margin through our model, as it speaks right now, we would get an EPS CAGR in excess of where you guys are guiding to. Alex, are there any below-the-line item considerations we need to take into account here, whether it's like a higher tax rate that would draw that back?

Or asked differently, what is the implied longer-term sales CAGR outlook that you're thinking for the business as we navigate, call it, next year in 2018? That would be helpful. And I have a follow-up.

Alexander W. Pease - Snyder's-Lance, Inc.

Yes. So a couple of things. One on the sales CAGR outlook, we are anticipating a relatively flat overall category environment and then we've guided to a growth rate where we anticipate being around 1 point to 2 points above the category growth rate over time. We have said that in the immediate 2018 timeframe, that number is more like flat to slightly below category growth, given some of the initiatives that we're putting in place, and then, trending to the category and then exceeding the category by 2020.

On the delta between the – basically the operating margin and the EPS CAGR, largely, what you're looking at as an anticipation of higher interest rate environment, we have a couple of refinancings coming due. And we plan to put in place a little bit more permanent capital, which will have an implication on our interest rate now, which is quite low. So that's really what's driving the delta there. We do have some tax rate headwinds just as growth in the U.S. outpaces growth in the UK that could lead to a tax rate that looks a little bit more like what we've seen in this quarter over time. So that hopefully helps you bridge the delta there.

Steven Strycula - UBS Securities LLC

Yeah. That's really helpful. And then, a quick follow-up question for both of you would be on trade dollar spend. You've done a good job recently communicating to investors that roughly 50% of the SKUs represent just 5% of the sales. As we think about migrating some of the trade dollars from the fatter part of the tail over to the more productive part of the portfolio, how should we think about what trade dollars does for the overall business, whether it's sales lift, gives us examples about how it impacts revenue productivity on shelf, and then, conversely, what that means for excess like factory overhead capacity to rationalize some of that tail? That would be helpful. Thanks.

Alexander W. Pease - Snyder's-Lance, Inc.

So I think it's important to point out, we've never said that we intend to reduce our absolute level of trade spending. What we said is we plan to improve the effectiveness of those dollars that we spend. And so as we're successful doing that, you'll obviously see greater lift from the investments that we make. So you'll see more – much greater trade productivity. We've referenced in the past the metric that currently about 70% of our trade dollars go towards negative ROI events, which is really not in line with the industry benchmarks on overall productivity.

Obviously, you're pointing to one of the huge benefits of the SKU rationalization effort. As we remove low profitability, low velocity SKUs from the shelf, we can redeploy the trade dollars that are going against those SKUs into the higher velocity, higher-margin SKUs, which basically improve the economic picture both for the retailer as well as for us. So that's a little bit the play.

Brian J. Driscoll - Snyder's-Lance, Inc.

But we also believe that this initiative will have a liberating effect on our IBO partners as they will now have an opportunity to sell against trade promotion activity against brands that perform better and respond better to that activity. So we believe the streamlining will enable us to get more space on the items that matter most and better display presence on the core SKUs. So we think that will have a liberating effect on the IBO partner network.

Steven Strycula - UBS Securities LLC

Very helpful. Thanks.

Brian J. Driscoll - Snyder's-Lance, Inc.

Sure.

Operator

And our next question comes from Rob Dickerson of Deutsche Bank. Your line is open.

Rob Dickerson - Deutsche Bank Securities, Inc.

Thank you very much and congratulations on a good start. So I guess, just as the first question I have is, in terms of the $175 million unlock, how much of that approximately even on a percentage basis do you foresee coming from that savings/supply chain optimization, Six Sigma, et cetera, piece?

And then, what have you factored in or what percentage of the total $175 million do you foresee coming from the revenue management portfolio optimization piece? And then lastly, is there an assumption in there for the stepped-up level of brand support reinvestment? Thanks.

Alexander W. Pease - Snyder's-Lance, Inc.

So the rough numbers would be at about two-thirds – maybe a little north of two-thirds of the $175 million will come from cost and productivity related initiatives and about another one-third comes from more of the marketing spend optimization, net price realization bundle of activities. So it's roughly two-thirds, one-third.

In terms of your question regarding reinvestment, we do have contemplated in our numbers a level of reinvestment in marketing. As Brian's indicated previously, that's a significant priority for the company. We're not prepared yet to disclose exactly what that number is. But we do anticipate making investments back in the brands to really build up the brand equity.

Brian J. Driscoll - Snyder's-Lance, Inc.

Yes. So our outlook does contemplate that reinvestments and what we think we've been conservative on is the impact of that reinvestment. We are in a process of building an inventory of campaign ideas in innovation and we're in the process of doing some testing and learning.

And so we've been quite conservative about what the impact would be. So we've added the marketing dollars to our outlook in terms of the net effect – the net savings, but we have not – we've been conservative on the corresponding impact until we get some results back from some of our testing.

Rob Dickerson - Deutsche Bank Securities, Inc.

Okay, great. And then just in terms of distribution gain potential, it sounded like in the call, you brought up distribution gains a couple of times. Is the – part of the revenue management, revenue synergy or regional expansion opportunity, let's say, is that something that we could foresee coming as soon as, let's say, back half of 2018? Or what you point to is, it might take a while for you to figure out exactly how quickly you rationalize the 750 SKUs and then where those dollars are headed into, let's say, more powerful core. And then once you have that, then there could be this push on a regional basis, which does – actually could lead to decent revenue upside? Thanks.

Brian J. Driscoll - Snyder's-Lance, Inc.

Yeah. We have pockets of opportunity in terms of distribution gain, but the big opportunity that we're referring to as a function of the reduction in SKUs is our ability to expand space and presence on our core items. So it's not necessarily in every instance adding new SKUs on core, but expanding core into the space vacated by some of the SKUs that we're eliminating.

So we think we'll get better productive capacity, if you will, in terms of our shelf presence than we have today in certain key categories. We're also trying to time some of this activity around the introduction of bigger ideas. So what you'll hear about going forward, as we move into some of the SKU rationalization phases, is that correspondingly, we will be introducing a new core innovation that we think will have a much improved ability to win on the shelf. So we're trying to do this in a way that softens the impact of some of the rationalization efforts.

Rob Dickerson - Deutsche Bank Securities, Inc.

Okay. Very helpful. Thank you, guys.

Brian J. Driscoll - Snyder's-Lance, Inc.

Yeah.

Operator

And our next question comes from the line of Akshay Jagdale from Jefferies. Your line is open.

Akshay Jagdale - Jefferies LLC

Thanks. And my question – the first question is a little bit math-oriented. But I'm having a hard time matching the $175 million profit improvements to the 14% goal to flattish sales. So can you just help me out there, Alex? I'm getting to 2017 EBIT guidance now of roughly $215 million. So if I add $175 million to that, we get to $390 million, divide that by 14%, I'm getting to $2.8 billion in sales. So can you – I'm probably missing something pretty basic there, but can you just help me match the absolute improvement to the percentage margin?

Alexander W. Pease - Snyder's-Lance, Inc.

So it might be more productive, Akshay, for us to take it offline. To be honest, I'm not exactly following where you're going. But we didn't say flat sales, just to be clear. We didn't say flat sales over the period. What we said was flat category growth. The guidance is slightly at/or slightly below the category in 2018; 2019 sort of matching category growth, and then slightly above category by 2020. So that's the kind of growth algorithm.

Then on the translation of the $175 million to the EPS number, the $175 million does have, we mentioned, some level of reinvestment in marketing. We're still, as Brian indicated, fine-tuning what that absolute level of reinvestment will be. And so to the extent we choose to reinvest to drive longer-term more profitable growth, we want to reserve the right to do that.

And then I also mentioned in a prior comment, below the OI line, I do anticipate a reasonably meaningful uptick in our interest rate expense. Right now, we have very low cost of debt, which I don't anticipate we'll be able to maintain throughout the course of the next few years. Does that help?

Akshay Jagdale - Jefferies LLC

Got it. Yeah, that helps. Just to be clear, so the $175 million, what you're saying is a gross number, or is that what will drop down to the bottom line? So in other words, the reinvestments are included in the $175 million or...

Alexander W. Pease - Snyder's-Lance, Inc.

No, no. $175 million will drop down to the bottom line.

Akshay Jagdale - Jefferies LLC

Yeah, okay. And just if you take a step back, Brian, obviously, a very decisive, aggressive plan, and obviously, the market investors appreciate that. Can you just help us walk through sort of what the execution risk is and how you think about it? You've talked about having the right people and it looks like you're close to a ninth inning on that, and you've been very decisive there. But can you just help us think through how you're thinking about the execution risk and why you felt comfortable with these targets, which in the food space not a lot of companies have achieved? Thanks.

Brian J. Driscoll - Snyder's-Lance, Inc.

Thanks, Akshay. Well, I would only argue that our low to mid-teens margin target is consistent with our competitive set. And we believe that it is critically important for us to achieve that and sustain – while sustaining the growth profile on our brands as we described. I would say that – Akshay, can you put that on mute for us, it sounds like you had a barbecue or something.

Akshay Jagdale - Jefferies LLC

Sorry.

Brian J. Driscoll - Snyder's-Lance, Inc.

All right. I would say, from an execution perspective, I have a high degree of confidence. Now what I want to be clear on is that there's no question that there's always execution risk in initiative like this. There always is. We believe that we have put in place a series of processes to assure that those risks are appropriately managed and that we have a rapid response effort and we have good visibility to what's working, what's not and what's needed.

I will say in this particular situation, we have clear visibility to the opportunities that we've described. And so we believe that our ability to get there is high. I have great belief in the strength of our leadership team and our organization at large, in our execution capabilities at retail, et cetera. So I feel very good about it, Akshay.

Akshay Jagdale - Jefferies LLC

Thanks a lot. I'll pass it on.

Brian J. Driscoll - Snyder's-Lance, Inc.

All right.

Operator

Thank you. And the next question comes from Amit Sharma with BMO. Your line is open.

Amit Sharma - BMO Capital Markets (United States)

Hey, everyone.

Brian J. Driscoll - Snyder's-Lance, Inc.

Hi, Amit.

Alexander W. Pease - Snyder's-Lance, Inc.

Hi, Amit.

Amit Sharma - BMO Capital Markets (United States)

Brian and Alex, so just wanted to go back to the top line expectation, just a little bit of clarification. You're calling for flat category growth. One of your large competitors or largest competitor, they've been doing low-single-digit (31:17). So are you being a little bit conservative in terms of category growth? And then, as you mentioned, you're not really modeling for a lift from higher marketing. So is it possible we end up being a little bit stronger on top line versus where we are looking for it to be at this point?

Alexander W. Pease - Snyder's-Lance, Inc.

Look, the way I'd answer it, Amit, is the one of the things that has gotten the company into trouble in the past is chasing lower quality growth and chasing growth at all cost. We've talked about that at length. So what we're really focused on is making sure the growth that we capture is both sustainable and of high-quality in the – high-margin attractive categories that we want to play in.

So we're really focused more on the absolute – getting the profitability and the earnings power of the company in the right position, and then, really delivering on the growth promised. But you're right. In general, the categories that we play in have demonstrated a slightly more favorable consumption profile than what we articulated here.

Brian J. Driscoll - Snyder's-Lance, Inc.

Yeah, we're not trying to be too conservative or too aggressive. We're trying to be center cut here. We think there's risk to being too aggressive in assumptions, and we think there's risk in being too pessimistic on consumption. So we take a look at patterns, we take a look at history, we took a look at current market conditions. We're very aware of what – we try to be very aware of what's happening in the marketplace with our competitors and our retail customers and then we make a call that we believe is center cut. Of course, we always hope that the category will respond more assertively from a growth perspective, but we're certainly not relying on that.

Amit Sharma - BMO Capital Markets (United States)

Got it. So just to be clear, if the category is growing better than flat, then that would be upside to the 2020 targets that you have laid out?

Brian J. Driscoll - Snyder's-Lance, Inc.

I would say more or less yes. We want to keep pace with the category that will always be our ambition where we're suggesting in 2018 that we might be slightly off that just considering the nature of the transition. But then going forward, we like to be on category and then in 2019 on or above. So, yes, depending on how the categories move, will affect our top line for sure.

Amit Sharma - BMO Capital Markets (United States)

Got it. And just one more for me. From a slightly long-term perspective, when you think about e-commerce sales and a lot of people have talked about, you lose some of the impulse purchase. Is that a consideration in your model? Or how do you think your e-commerce sales progressing over the next two years, three years?

Brian J. Driscoll - Snyder's-Lance, Inc.

We're very optimistic about our position within e-commerce. I've spent some recent time digging a little deeper into that element of our business. Our growth in that area has been quite robust, where we feel really good about how branded products are responding in that environment. And so I'm very optimistic about it.

In terms of impulsivity, I don't think I know the answer to that question yet. I know where you're going, and I'm not quite sure yet that we have a full understanding of how that might play in. And so I would not say that we've considered that element of your question in a way that would affect our plans and outlook.

Amit Sharma - BMO Capital Markets (United States)

Got it. Thanks so much.

Brian J. Driscoll - Snyder's-Lance, Inc.

You got it. Thanks, Amit.

Operator

And our next question comes from the line of Jonathan Feeney with Consumer Edge. Sir, your line is open.

David Mandel - Consumer Edge Research LLC

Hi. Good morning. This is Dave Mandel in for Jonathan. Thank you for taking my question.

Brian J. Driscoll - Snyder's-Lance, Inc.

Hey, Dave.

David Mandel - Consumer Edge Research LLC

So I have a couple of quick ones. One of them is on non-track channels. Can you guys give me a rough estimate of channels that are not tracked by Nielsen and IRI and how they're performing recently?

Alexander W. Pease - Snyder's-Lance, Inc.

So largely, that would be our club business, which has been doing extremely well through the sort of full bag selling approach that we're doing directly from the warehouse. We also have natural. Obviously, natural has been under a bit more pressure, which you've heard about. Our natural business has done fairly well, given the strength of KETTLE there. Those would probably the two – those would be the two biggest drivers in the non-track channel.

David Mandel - Consumer Edge Research LLC

Yeah. And then is e-commerce a big business?

Alexander W. Pease - Snyder's-Lance, Inc.

E-commerce for us isn't a meaningful – it's a meaningful growth arrow in our quiver. But right now, it doesn't have enough scale to really impact the numbers.

Brian J. Driscoll - Snyder's-Lance, Inc.

And just as...

David Mandel - Consumer Edge Research LLC

Are there...

Brian J. Driscoll - Snyder's-Lance, Inc.

...some club is tracked, but there's a substantial portion that's not.

David Mandel - Consumer Edge Research LLC

Are there plans to grow the e-commerce business? I know most food manufacturers have it at the 1% to 2% rate, but it's growing exponentially. So are there plans for that or...

Alexander W. Pease - Snyder's-Lance, Inc.

Yeah. There's strong plans in place for the e-commerce business. We've almost doubled it in this past year alone.

David Mandel - Consumer Edge Research LLC

Oh, wow. Great. And the last question I have is it seems to be the topic of the day around the growth trajectory for the next few years. It seems like you've clarified that pretty well when you expect to grow above or below the category.

If you think in terms of execution risk in terms of margin expansion or the follow-up top line growth expected post margin expansion, to me, it seems that it would be the latter is what most food manufacturers are having trouble with. Would you agree with that? Is the post margin expansion growth based on trying to control SKU proliferations something that you think is an execution risk?

Brian J. Driscoll - Snyder's-Lance, Inc.

Let me see if understand your question. Are you asking if we believe the risk to growth is because – in other words, other companies are improving their margin structures in doing many of the things that we're talking about doing. But they've not seen a corresponding effect in terms of revenue growth perhaps because of the nature of the investments and what they do with that margin expansion? Was that the first part of your question?

David Mandel - Consumer Edge Research LLC

That is my entire question. So is that – yeah.

Brian J. Driscoll - Snyder's-Lance, Inc.

Yeah. Look, I think that that's so – yes, that's been my observation as well. The key for us – and I believe the measure of our success will be less our ability to generate and improve margin profile and operating profit picture, and more our ability to reinvest those dollars in ways that allow us to achieve this level sustainably.

Because you're going to run out of areas to cut costs. So what tends to happen is you create this pile of margin dollar improvement, you invest it in the wrong activities, the pile depletes, you've not created that flywheel effect and then you're looking to go out and acquire something to create synergies again.

That's not what we're trying to do here, which is why I talked about the Lance advertising initiative. We're trying to create an inventory of campaign ideas that we have confidence in such that we know that once we create this incremental margin improvement profile, we have access to campaigns and new products that we can invest in that'll create that flywheel effect.

And that's the virtuous cycle. That's what we're trying to get done. So our brands production and growth at the core produces the outcome we desire going forward. And that's really the key. It's not just saving money and improving margins in a vacuum. We've got to reinvest it over time smartly in ways that will give us the traction we need to produce this profile for the long term.

David Mandel - Consumer Edge Research LLC

That sounds great. That's all I got. I'll pass it along.

Brian J. Driscoll - Snyder's-Lance, Inc.

All right. Thanks.

Operator

And our next question comes from the line of Brett Hundley with Vertical Group. Your line is open.

Brett Hundley - Vertical Trading Group LLC

Hey. Good morning, guys, and Brian, congratulations on the appointment.

Brian J. Driscoll - Snyder's-Lance, Inc.

Thank you, sir.

Brett Hundley - Vertical Trading Group LLC

Alex, I want to revisit a back and forth that you had with Akshay, because I'm honestly confused on the $175 million. So this may be a bit too aggressive, but if I take a 2.5% sales CAGR and put that out to 2020, and then put a 14% EBIT margin on that, I'm in the neighborhood of $330 million. And if I compare to EBIT now, if we just use a very nice easy round number of $200 million, that implies about $130 million in EBIT growth out to 2020.

And what I thought I heard you say earlier is that you're kind of earmarking a portion of that $175 million for reinvestment. And so you don't have to talk to those numbers specifically. But does that makes sense, that maybe some of those monies would be held back for reinvestment? And I guess, that implies about 75% of your target falling to the bottom line. And if the remainder goes into reinvestment, I think your advertising budget last year was a little bit north of $50 million – five-zero million. So if you were to spread out $40 million plus or so from the $175 million, that might be around 20% growth annually in your advertising or brand support budget. Just, I guess, directionally, do some of those numbers make sense?

Alexander W. Pease - Snyder's-Lance, Inc.

Yes. So let me take another run at this, and we might have to set up some follow-on time as well. So the $175 million, just to clarify, the $175 million includes a level of advertising reinvestment in it.

Brian J. Driscoll - Snyder's-Lance, Inc.

In other words, that's a net.

Brett Hundley - Vertical Trading Group LLC

Yes, got it. Yep, that's a net number, yep.

Alexander W. Pease - Snyder's-Lance, Inc.

That's a net number. We haven't specified what that number is. It may be that we choose to – to the extent we're being more successful in driving bottom line savings, we may choose to invest more into the brands, but we would still commit to the $175 million number that we're articulating here. So that's the first point.

The second point was – that I actually forgot to mention with Akshay, but there are embedded in our number, it does not contemplate a certain number of headwinds. And so the specific headwinds that I'm referring to are really merit increases to keep up with inflation for salaries as well as taking the management team's bonus pool from where it's been the last couple of years up to something more like 100%. So there's a couple of those headwinds that are in there as well.

Brett Hundley - Vertical Trading Group LLC

Okay.

Alexander W. Pease - Snyder's-Lance, Inc.

That's the only thing that's not reflected in the $175 million.

Brett Hundley - Vertical Trading Group LLC

Okay, that's really helpful. Sorry for belaboring that. And then just secondly, Alex, would you mind addressing, to the extent that you're comfortable – the company's commodity view into 2018 and your coverage surrounding that, just given some moves that we've seen in wheat, cooking oils and things like that.

Alexander W. Pease - Snyder's-Lance, Inc.

Yes. So we generally see the commodity – we've been in a fairly deflationary commodity pricing environment for the last few years. We don't see that trend continuing, if anything we see us being in a more inflationary environment. We've already seen that on a number of things you mentioned, wheat, cashews for us have been fairly inflationary.

The good news is we enter into quite long-term contracts. So we're still between 9 months and 12 months forward purchase out to mitigate the volatility of those. And our general view is that any shift in kind of the commodity complex cost environment, we should be able to reflect in our overall list price strategy. So we don't anticipate any inflation in the commodity environment having a material impact on our gross margins. But that's really only because we manage it for a long enough time horizon that we can get pricing in line with what the raw material cost structure looks like.

Brett Hundley - Vertical Trading Group LLC

Very good. Thank you, sir.

Alexander W. Pease - Snyder's-Lance, Inc.

Thank you.

Brian J. Driscoll - Snyder's-Lance, Inc.

Thanks, Brett.

Operator

And our next question comes from the line of Bill Chappell with SunTrust. Your line is open.

Unknown Speaker

Good morning. This is actually Stephanie (45:42) on for Bill. Can you provide just a little bit more color on the drivers for raising the EPS guidance for 2017? And then, secondly, maybe just more color on some of the 2017 innovation, has it gone as planned in terms of distribution and consumer acceptance? And then how – any R&D focus or new product launches, how are you looking at that in the coming years? Thanks.

Alexander W. Pease - Snyder's-Lance, Inc.

Yeah. So let me take the rationale for raising the bottom end of guidance. As you know, we took action about two weeks ago to release a fairly significant number of our head count, 250 folks or so. That obviously begins to flow through the P&L this year. All of that impact would be above the OI line as would the financial impact of closing the Perry manufacturing facility.

Some of these obviously begin to reach full run rate immediately in Q3. Some take longer timeframe to execute. The reason you don't see that – you see the EPS guidance go up less than you see the EBITDA guidance go up is because we have guided to higher interest rate expense and a higher tax rate. So that's why there's a little bit of a leakage between the EBITDA lift and the EPS lift. So hopefully that answers that question.

On the innovations, I'll have Brian say a little bit more. In general, I would say, the view of the class of 2017 is mix. So we've seen a relatively good distribution within Wholey Cheese!, a little bit less strong, but still okay in variety pack. The big question will be as we shift from trial to repeat, how that conversion takes place and do we maintain significant velocities or enough velocity to keep those things on shelf for the duration.

I think the other question and you'll see this in some of our remarks is, how does the margin profile of the product innovations impact our overall branded mix. Right now, the introduction of new products is actually having a dilutive effect on our branded mix, which is something we need to be sure we're monitoring proactively.

Unknown Speaker

Great. Thanks so much.

Brian J. Driscoll - Snyder's-Lance, Inc.

Yep.

Alexander W. Pease - Snyder's-Lance, Inc.

Thank you.

Operator

Our next question comes from the line of Michael Gallo with C.L. King. Sir, your line is open.

Michael W. Gallo - C.L. King & Associates, Inc.

Good morning. I just wanted to dig in a little bit on what the annualized impact is from the transformation plan initiatives already that have taken place to-date? And just overall when we think about the $175 million plan, how much of that do you think you'll get in 2018? And then, how much of that – if you sort of assume that you start to get it even in the back end hereof 2017? Thanks.

Alexander W. Pease - Snyder's-Lance, Inc.

Yes. So we haven't provided a specific dollar amount on the impact that we've already delivered. Obviously, you can use some pretty basic assumptions, it was 250 individuals that were impacted, you can draw your own conclusion on what the average salary was. But I can tell you, it's a meaningful number, and it's part of the reason why we felt very confident in raising our guidance. We do, as Brian indicated in his remarks, we do anticipate in 2018 getting to something north of a 10% margin. And then in 2019, getting into the – starting to touch the teens with the full run rate being realized by 2020.

The last piece that I should mention that wouldn't necessarily be completely obvious to you, I mentioned the 250 folks that were impacted in the immediate reduction in force, we also have a plant closure that I mentioned, the Perry facility down in Florida, that has an incremental 50-or-so head count associated with that, plus all the utilities and associated capital charges and so forth. So hopefully that gives you enough to come up with a run rate number.

Michael W. Gallo - C.L. King & Associates, Inc.

And then just a follow-up question, it was nice to see Pop Secret moving in the right direction this quarter. Yeah, obviously, the category remains challenging, but how confident are you that you can – through what the initiatives or what you're controlling that you can continue to keep Pop Secret growing assuming category trends don't really improve much? Thanks.

Brian J. Driscoll - Snyder's-Lance, Inc.

I would say, I am very cautiously optimistic as opposed to cautiously optimistic only because I like what I see in terms of the distribution gains we're getting. I like the campaign efforts. I love what we've done in terms of improving the ingredient profile.

And I do think that we have visibility to some improved merchandising in the back half that will positively overlap next year. However, with that said, it is a challenge category. Activities can change, retail plans can change, et cetera. So the jury is still out. But based on what I have visibility to today, I would say that I am very cautiously optimistic.

Michael W. Gallo - C.L. King & Associates, Inc.

Thank you.

Brian J. Driscoll - Snyder's-Lance, Inc.

Thank you.

Operator

That concludes our question-and-answer session and our conference for today. Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. And everyone, have a great day.

Brian J. Driscoll - Snyder's-Lance, Inc.

Thank you.

Alexander W. Pease - Snyder's-Lance, Inc.

Thanks.