Snyder's-Lance (LNCE) Q3 2017 Results - Earnings Call Transcript

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

Snyder's-Lance, Inc. (NASDAQ:LNCE) Q3 2017 Earnings Call November 7, 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

Jonathan Feeney - Consumer Edge Research LLC

Brett Hundley - The Vertical Group

Steven Strycula - UBS Securities LLC

Rob Dickerson - Deutsche Bank

Akshay Jagdale - Jefferies LLC

Amit Sharma - BMO Capital Markets (United States)

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

Operator

Good day, ladies and gentlemen, and welcome to the Snyder's-Lance, Third Quarter 2017 Financial Results Conference Call. Currently 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. Also, as a reminder, this call is being recorded.

I would now like to turn the call over to your host, Kevin Powers. Sir, you may begin.

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 third quarter results and updated outlook for fiscal 2017. 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 future events, including our company's performance. Forward-looking statements involve risks, uncertainties and assumptions that are based on information currently available to us. Actual results could differ materially from those described in the forward-looking statements due to many factors. Information concerning these factors is contained in the report of our financial results we released early this morning and in our company's SEC filings. 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 third quarter earnings conference call. Considering the recent Investor Day detail we provided on our overall performance transformation plan, we'll focus today primarily on our third quarter performance and full-year outlook.

As the transformation begins to gain momentum, we will be updating you regularly on our progress. This morning, we reported third quarter results that were generally in line with our expectations reflecting continued improvement across our priorities.

The actions we've taken to stabilize the business and reverse certain trends are taking hold, and in the quarter, excluding special items, we delivered net revenue, operating profit, EPS and EBITDA growth. However, we did see significant headwinds in freight and logistics expenses, which we believe will persist into fiscal 2018, as well as higher than expected costs related to our Emerald facility relocation, both of which offset some of our momentum.

Regarding the Emerald plant relocation from Stockton to Charlotte, this capital project has been more challenging than we expected, resulting in higher costs than planned and service level disruptions. That said, while there'll be a lingering cost and service effect in Q4 associated with this, we have been making encouraging progress of late, and are confident these pressures will abate and margins will improve dramatically once we have the line operating at a more normal level of efficiency.

To provide some additional context on the quarter, net revenue increased 3.7% led by solid Core Brand growth of 4.9%. Excluding special items, operating margin expanded by approximately 130 basis points to 10.7% for both gross margin expansion and operating expense efficiency, despite the headwinds I mentioned above related to Emerald production costs and freight expense. Adjusted EPS increased 10% to $0.33 and adjusted EBITDA grew 14% to $85.2 million. Our top line growth reflects continued market share gains across the portfolio and strong branded growth.

In the 13-week IRI MULO period ending October 1, total branded retail sales increased 6.1% led by Late July, Lance, Kettle Brand, Cape Cod, Snyder's of Hanover and Snack Factory. Of our Core Brands, two brands experienced softness; Pop Secret, where we continue to face a very challenging category environment and we are taking deliberate steps to partially offset this pressure through packaging renovations and front line sales efforts to improve in-store merchandising; and Emerald with softness in the quarter that we believe was driven entirely by the internal production challenges related to the ramping-up of our new production line in Charlotte.

Snyder's of Hanover performed well in the quarter with retail sales increasing 4.1% driven by ACV gains and strong base velocities. Importantly, we grew market share by 30 basis points with the category growing 3.3%. Lance retail sales increased a solid 19.2%, driving over 7 points of share gain. This 13-week period reflects a strong back-to-school season marked by distribution gains, growing base velocity and more effective levels of promotional support among other factors.

Our Q3 momentum was also supported by an integrated marketing plan, including regional TV, radio, digital, social media and consumer promotions. While these trends are not likely to continue in the fourth quarter given the natural seasonality of the brand and the ramping-down of our media investments, we were excited to see the brand respond so well and plan to build on this in future campaigns. Both of our kettle chip brands performed well in the period, delivering strong sales growth and share gains. Cape Cod gained 2.2 share points, with retail sales increasing by 5.3%.

This solid growth was fueled primarily by base velocity strength across most Core product lines. Kettle Brand gained 1.5 share points with retail sales up 4.8%. Our core fried, alternative oils and organics lineup continue to perform well.

Moving on to Snack Factory and Late July, we had solid growth on both brands driven by strong velocity gains and ACV growth. Snack Factory continued its strong performance in Q3, growing total dollar sales by 3.5% and gaining 1 point of share. This was driven by a healthy base business, specifically Pretzel Crisps with base sales growth of 5%. Late July delivered double-digit growth for the fourth consecutive quarter and remains the number one contributor to growth in the natural organic tortilla chip category and grocery.

In addition to having the number one and number two SKU in the natural channel, three of the top five tortilla chips SKUs are Late July's restaurant style tortilla chips. Overall, we continue to see top line momentum and our Core operating performance has us on track to meet our full year earnings targets. This morning, we refined our full year adjusted EPS, EBITDA and revenue expectations, which Alex will discuss momentarily.

In sum, I am optimistic about our future potential and our prospects heading into 2018. Our transformation plan is on track with considerable progress being made. We remain on track to unlock $175 million in operating profit improvement that will enable us to deliver our 2020 financial targets of 14% operating margins and an EPS CAGR of 11% to 13%. While we will provide our full 2018 financial outlook on our year-end call, we are increasingly confident that we will be in the low double-digit operating margin range, which is consistent with the expectations we provided during our Investor Day.

In addition, our innovation lineup for 2018 is more refined and focused, keeping centered on our Core product lines and driving incrementality in the category and we are finalizing our organizational shift to a business unit structure, which will raise the level of P&L ownership and accountability in the organization.

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 third quarter revenue increased 3.7% to $564.2 million. Total branded revenue increased 4.8% to $447.4 million, while partner brand net revenue increased 20 basis points and contract manufacturing revenue decreased 1%.

Within our branded revenue category, Core Brands grew 4.9%, while our Allied brands grew 3.5%. The Core Brand net revenue growth was led by Late July, Snack Factory, Pretzel Crisps, Lance, Snyder's of Hanover, Cape Cod, and UK KETTLE Chips, partially offset by a decline in Emerald, Pop Secret and in the Kettle domestic brand.

Turning to operating income, third quarter operating income, excluding special items, increased 18.7% to $60.6 million or 10.7% of net revenue, as compared to $51.1 million or 9.4% of net revenue in the same period of last year. Operating margin expansion was the result of lower G&A expense, strong mix of branded sales and supply chain productivity and cost initiatives. These were partially offset by higher service and distribution costs primarily related to trucking capacity and fuel as well as continued higher than normal manufacturing cost due to the ramping-up of Emerald production capacity in our new Charlotte facility.

Net interest expense in the third quarter of 2017 was $10.1 million, compared to $9.2 million in the third quarter of 2016. The tax rate in the third quarter, excluding special items, was 35.4%, as compared to 28.9% last year. The increase in the tax rate was primarily due to a reduction in operating income from our UK operation.

Adjusted EBITDA increased 14% to $85.2 million or 15.1% of net revenue, as compared to $74.7 million or 13.7% in prior year. The GAAP net loss in the quarter was $57.7 million or $0.60 per share and net income, excluding special items, was $32.7 million or $0.33 per share. In the quarter, we incurred $90.5 million of after-tax expense affecting GAAP comparability.

These were primarily the result of a non-recurring, non-cash impairment charge of $84.9 million after tax, reflecting the write-downs of the company's European reporting unit goodwill, the company's UK KETTLE Chips trademark and the Pop Secret brand trademark.

For clarification, the UK trademark impairment was only related to the portion of the brand being sold in the UK and EU, which has seen significant competitive pressure from the acceleration of private label trends and a soft macroeconomic environment. While we're extremely optimistic about the outlook for this brand and our European opportunity overall, historical trends and current economic uncertainty in the UK caused us to impair both the trade name and the goodwill accordingly.

Turning to cash flow. We generated $80 million of free cash flow in the nine-month period ended September 30, 2017 as compared to $112 million in the same period last year. This excludes $134.3 million of cash from operations and nets out $54.8 million in capital expenditures largely related to growth investments. In addition, our leverage was approximately 3.76 times at the end of the third quarter as we continue to pay down debt in line with our expectations. 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 results year to date and expectations for the fourth quarter, we're updating our full year 2017 guidance. For 2017, we're raising our net revenue expectations to a range of $2.205 billion and $2.255 billion. We're tightening our expectations for earnings per share guidance, excluding special items, from $1.10 per share to a $1.20 per share to a $1.12 to a $1.17 per share and adjusted EBITDA from $300 million to $325 million to $305 million to $320 million. For the full year, we continue to expect net interest expense in the range of $37 million to $40 million, an effective income tax rate between 35.5% and 36.5%, capital expenditures in the range of $75 million to $85 million and a weighted average diluted share count of approximately 98 million shares.

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

Question-and-Answer Session

Operator

Thank you, sir. Our first question comes from Jonathan Feeney of Consumer Edge Research. Question, please.

Jonathan Feeney - Consumer Edge Research LLC

Hi. Good morning. Thanks very much for the question, guys.

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

Good morning, Jon.

Jonathan Feeney - Consumer Edge Research LLC

I wanted to ask, in light of pretty strong Core Brand results, could you dimensionalize for us both in the quarter and going forward, what SKU rationalization is going to mean, how we'll see that in takeaway, and emphasizing the right product and channels that you talked about in the past? Like how would you estimate we already felt that, how's that going, how would you expect us to feel that, especially in the Core – within that Core Brands where you grew 4.9%? Thank you.

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

So, Jonathan, really, the SKU rat takes place largely in the first quarter of next year is when we start to really take a meaningful bite at that opportunity. What we've done through the end of this year is largely cleanup of SKUs that either had very, very low volumes already or non-existent volumes. So it was largely just removing things from the portfolio that were already dead or dying on the vine. So, it's not really until next year that you'll feel the full weight of any actions that we take on SKU rat.

As we've explained, we expect the majority of the actions that we take on SKU rat to be handled with a transferability of demand. So for example, if we remove, and I'm not saying that this is a SKU that we're going to remove, but if we were to remove a Korean Barbeque flavor, then demand would transfer perhaps to Sriracha chili or something like that. There are certainly instances of SKUs that we will remove where there will not be transferability of demand and for that reason, we've guided to a growth algorithm next year of something that's relatively flat to where the category is versus where we've been over the course of the last year, so which is a point or a couple of points above the category. So next year, we're anticipating a little bit more flatness relative to the category environment, because of the impact of SKU rat and you'll begin to see most of that towards the end of the first quarter beginning with the kind of full effect in the second quarter.

Jonathan Feeney - Consumer Edge Research LLC

Okay. But nothing you've seen this quarter changes that?

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

No.

Jonathan Feeney - Consumer Edge Research LLC

Okay. Thank you.

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

Thank you.

Operator

Thank you. Our next question comes from Brett Hundley of The Vertical Group. Question please.

Brett Hundley - The Vertical Group

Hey. Good morning, guys. Thank you. Just quickly, can you talk to the transition or the relocation on Emerald as being more challenging than expected, maybe there are one or two things that really jumped out at you and could you quantify that maybe from an absolute dollar or margin impact?

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

So, yeah, we could probably occupy the rest of the call talking about this particular issue, but we'll keep it brief. Effectively, there is a couple of things that have gone into the transition that have made it more challenging. Just for the context of everybody on the call, what we were doing was dismantling a facility in California, shipping it 2,500 miles or all the way across the country and then, reassembling it in Charlotte. In the course of doing that, we were also adding upgraded engineering functionality to improve food safety, improve material handling, improve operating efficiencies and so forth. So the overall investment case, once the plant is up and running, is actually very compelling. So we'll see significantly improved operating margin performance from what we saw historically when the plant was operating in Stockton. So in terms of what's been challenging, handful of things. First, obviously, just the inherent nature of plant relocation of that magnitude is always going to be challenging. So, that's just a truism.

On top of that, obviously, given the distance we were relocating the plant, we weren't able to retain or we were able to retain only very limited amounts of the talent pool, so we're effectively rebuilding the talent pool from scratch.

Third, is that we have – we've engineered some complexity into the plant that is requiring us to learn new capabilities. So things like automated material handling that requires a different level of rigor around cleaning for allergens, things like automated case packing, those sorts of things. So the complexity overall has been significant.

In terms of quantifying that the rough magnitude on the quarter, there's some puts and takes. Because of the cost issues that we faced, we've actually had to take down some of our internal bonus accruals, because we're not going to deliver that. So that provided a little bit of an offset to the headwinds that we faced. The net of those two numbers is around $0.02 for the quarter.

Brett Hundley - The Vertical Group

Okay. That's really helpful. And if I can just squeeze in one other quick one. Brian, I just wanted to ask you about the Kettle Brand. You've known this brand for a while and I'm curious kind of how many times the Kettle Brand in the U.S. has seen softer sales performance in recent years and whether or not this is concerning to you, especially given some of the geographic growth opportunities that you've been pursuing across the states and maybe it might even be helpful, I know it would be for me, if you could kind of give us a state of the union on the natural aisle, just given what seem to be ever increasing competition there? Thank you.

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

Sure. So two things. First of all, just a follow-on comment to the Emerald relocation. Our capital project execution capability batting average is very high. I would characterize this as an exception to the rule. This is a very, very significant move for the company, unlike our norm, and I am encouraged by the progress of late, but it certainly did have an impact that's lingering into Q4, but we're making very good progress.

With respect to the Kettle Brand, I mean, I would continue to draw your attention to the MULO results and the fact that the Core Brand is performing well. In the marketplace, we had some shifts in promotional activity, we had some promotional activity that we elected not to repeat, and so there was elements like that that affected the top line performance of the brand.

I am very confident in the prospects for the brand. I am very bullish on the future of the brand and believe that it has the same prospects or better that I've described historically. With regard to the natural channel, as you know, as more mainstream retailers are getting more involved in the similar categories and brands as the natural channel, it's putting some pressure on that. We have an extremely strong share in the natural channel, so to the extent that that shift is taking place, it has had a little bit of an impact. With that said, as mainstream retailers are advancing those capabilities, we're performing extremely well within it. So, I think on balance, we like our prospects and feel really good about the strength of the brand.

Brett Hundley - The Vertical Group

Thank you.

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

You got it.

Operator

Thank you. Our next question comes from Steve Strycula of UBS. Question please.

Steven Strycula - UBS Securities LLC

Hi, guys. How are you doing?

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

Hi, Steve.

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

Hi, Steve.

Steven Strycula - UBS Securities LLC

So, first question would be, wanted to get a sense of – there's a lot of noise out there right now in the snacking aisle with people changing over their distribution model. I know only parts of that might affect your portfolio. Can you kind of dimensionalize it for us and help us understand which one of your brands and portions of your category are maybe feeling some of that or benefiting from some of those tailwinds of snacking disruption down the aisle, and how do you view the opportunity set going forward? And then, I have a follow-up.

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

So, in terms of the immediate impact, I think, of course, we've realized some benefits on sandwich crackers as a result of some of the changes you described. And so, certainly, picked up some distribution and believe are gaining some advantage on the shelf as well, and perhaps, also on merchandising support. So, I do think that that has benefited us to some extent. I think as this becomes more of – as retailers become more conditioned to this dynamic, that might moderate a bit, but we have seen some benefit as a result of it.

With that said, the lion's share of our DSD businesses are in the salty snack aisle, which has not been affected by those recent changes. And I don't anticipate that to be the case going forward. With that said, to the extent that brands are moving off of direct-store-delivery, no matter the category, I think it provides merchandising advantage to those who are on DSD.

So, whether or not a product is distributed via DSD in salty snacks or not, to the extent that DSD goes away on a category, it advantages those who remain on it, because you're in store more often and you have access to display opportunities in ways that others may not. So, I do think that, while we're not directly affected by the change in DSD and salty snacks, we can benefit from a display perspective going forward on it.

Steven Strycula - UBS Securities LLC

Great. That's helpful. And for a follow-up, just wanted to get a sense of higher freight inflation costs, it's affecting everybody in the industry, but wanted to get a sense of what your ability or conversation flow is with the retailers in the marketplace, are they being sympathetic in allowing some price concessions or allowing you guys to take price mix anywhere across the portfolio? Is it more geared to Core Brands? I imagine not Allied Brands so much, give us a touch for that.

And then lastly, I know dating (24:50) all the way back to CAGNY, a lot of innovation was talked about at the start of the year and wanted to get a sense for what products they use – launch into the marketplace, feel like they have more of a multi-year food product cycle, like they're really a hit. And then conversely, which ones are kind of one and done? Thanks.

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

Sure. So, with respect to distribution costs, logistics costs, I mean, I would say that most in the industry are sympathetic to the challenges that exist, whether or not that translates into being sympathetic on pricing actions might be an entirely different story, but nevertheless, in terms of recognizing and embracing the fact that we have to work closer together to try to improve efficiencies in the system such that the pressure isn't felt to the same degree as it might otherwise be felt, I would say that there's a broad understanding of the issues in front of us. In terms of pricing along those lines and price realization along those lines, I guess time will tell.

With respect to innovation, I would say the most successful innovation we've had this year that I think has the greatest likelihood of remaining in the portfolio going forward and being a factor in a portfolio is our Wholey Cheese! Business. Our repeat levels are strong, our velocity levels continue to improve. We've not yet achieved our full distribution opportunity. So, I think, there's some headroom there, so we feel good about that. And so, I'd say that that's the one that I have the greatest degree of confidence in in terms of having – being sustained in a portfolio going forward.

Steven Strycula - UBS Securities LLC

Thanks, guys.

Operator

Thank you. Our next question comes from Rob Dickerson of Deutsche Bank.

Rob Dickerson - Deutsche Bank

Hello. Thank you. Couple of quick questions. Just in terms of guidance for the year, I guess the range is narrowed a bit for 2017. But I was curious in what's implied for Q4? And it looks like there might be a little bit of an incremental year-over-year step-up in EBITDA dollars relative to what we saw in Q3. So, I guess, the first question is just, is there anything that should benefit the fourth quarter relative to what we're seeing in the third quarter?

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

I mean, really, what we're anticipating in the fourth quarter, as Brian mentioned, a lot of the headwinds we faced in gross margins, should begin to abate as we get the Emerald production issues behind us and we're already seeing signals, this week was the best week on record for that production line. So we're quite confident that, that some of those headwinds will abate. You'll see continued improvement on other costs of goods, particularly in raw materials as the fresh potato crop comes in and potato gravities now are significantly above where they were. At the beginning of the year, you'll see the full impact for the quarter of the closure of the facility in Florida that we mentioned.

So all of those will contribute to positive momentum on gross margins and then we're continuing to take actions on the operating expense line to improve operating efficiencies with both the head count reductions that we've described, as well as ongoing ZBB activities. So, that's really why the boost in EBITDA.

Rob Dickerson - Deutsche Bank

Okay. Great. And then just in terms of the increase in the freight distribution cost, I'm pretty sure, I know what's driving it, I just want to be clear about it. So, if you can maybe just explain very simplistically kind of the core driver of the cost inflation on the freight and distribution side? One.

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

Sure.

Rob Dickerson - Deutsche Bank

And then two, – I'm sorry, just – and then two just, how is – like is there any difference in how that cost inflation might affect you given the IBO model relative to a company maybe more warehouse or is it pretty much all the same"? That's all.

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

So, yeah, so there's basically three issues that are impacting freight, one of which is transitory, two of which are a little bit more enduring. So, the three issues are obviously the hurricane effect created significant demand for freight and logistics capacity, all being directed down into the impacted regions, and that drove up rates.

The second is, there is a regulatory change going into effect, that's essentially limiting, enforcing limitations on the number of hours drivers can spend behind the wheel, which in order to keep their earnings potential similar or on par, drivers are choosing to exit the industry. So you're seeing driver shortages.

And then the third, our fuel inflationary effects. Obviously, the last two, those last two buckets are things that we expect to endure through 2018. The first bucket is more transitory and we're also – we're already seeing signs of that mitigating. In terms of how that manifests itself through the DSD network versus the direct, obviously, to the extent we're handling product multiple times, we incur greater logistics expense than you would in a direct business model.

We're taking and you'll remember back in the Investor Day, the number of the steps that Kirk and the manufacturing and logistics team are taking to really reduce the impact of those double-handling steps, but that's real and those are actions that we'll be putting in place in the first and second quarter of next year to address the issues more structurally.

In terms of the IBO themselves, of course, the IBO is an independent operator. So to the extent they're being impacted by fuel, that impacts their business model, that doesn't impact our business model.

Rob Dickerson - Deutsche Bank

Okay. Very helpful. Thank you, Alex.

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

Yeah.

Operator

Thank you. Our next question comes from Akshay Jagdale of Jefferies. Question please.

Akshay Jagdale - Jefferies LLC

Hi. Good morning.

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

Hi, Akshay.

Akshay Jagdale - Jefferies LLC

Hi. So I wanted to ask about sort of the cadence of the P&L as we go through – as you guys go through this transformation, right. So right now, sales growth extremely strong, margins are starting to inflect, but then, as Alex mentioned, starting in 1Q, I guess, of 2018, you're going to start to see sales take a step back which is all planned. I'm assuming the margins should start to pick up right after that. But can you help us a little bit on the cadence? I mean, I think you mentioned low double-digit margins, but any more color there in terms of understanding how this will start to play through your P&L and when would be super helpful. Thank you.

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

I think as we've mentioned before, we begin to see some moderation on the top line in Q4, principally, as a function of the some of the changes we're making on low ROI and inefficient trade spend, and also some – the limited beginning of SKU rationalization. I would say the SKU rationalization and the effect of that on the broader top line for fiscal 2018 will begin towards the tail end of Q1. And I would say that also that would be the time where we would be beginning to see the margin level for the company starting to inch up as we've mentioned before.

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

The only thing just to remind you, and Akshay, you know this having followed the company for a while, there is a natural seasonality effect as well. So the first quarter is always the softest quarter from a year-over-year growth and margin standpoint. So that's just one thing also to have reflect in your modeling.

Akshay Jagdale - Jefferies LLC

Okay. And then just one follow-up, as it relates to your longer-term margin goal, and maybe you've already mentioned this because your Analyst Day was very thorough, but if I forgot it, I apologize in advance. But what's the mix between sort of SG&A leverage versus gross margin expansion? I mean, we are modeling a lot more SG&A leverage over the next three years and more moderate sort of gross margin expansion. Is that the right way to think about the margin expansion or is it just too early right now to give a breakout on that?

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

So, remember back to the Analyst Day, the way we've sort of broken out the opportunity in rough buckets is a third of the opportunity comes from cost of goods sold, about a third of the opportunity comes from ZBB and org-related savings, and then about a third of the opportunity comes from all the other levers that we're pulling. So, that sort of helps dimensionalize it somewhat. In terms of operating margin improvement over the course of the forecast period, we are anticipating probably somewhere in the order of 2 points to 4 points of improvement in COGS as a percent of gross sales. So, we're anticipating a healthy improvement there. And then in terms of SG&A, we're anticipating basically about a point, point and a half of improvement over time. Obviously, the SG&A will be impacted also by the incremental investments in marketing and advertising that we've communicated right across the board.

Akshay Jagdale - Jefferies LLC

Perfect. One last one. Can you comment a little bit on M&A activity? I mean, obviously, multiples in this space from a public equity standpoint have come down pretty considerably in the last year or so. What are you seeing out there environment wise? Are you seeing more reasonable expectations in terms of sellers and do you have a view on if overall activity might pick up or not or just curious to get your thoughts?

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

I think what we have communicated as it relates to M&A is, we've got a lot of internal work to say grace over, at least, for the next, call it, 6 to 12 months. And so, while we are certainly open to pursuing bolt-ons should the valuation and the strategy make sense and the opportunity arises, we'll actively engage in those dialogs.

Anything more transformational is probably something that, that we'd put on the back burner until we get our internal operating performance in line. As it relates to your specific question on the health of the market, for the assets that we would potentially be interested in, there is still pretty significant multiples. And so, we haven't found anything that's out of valuation that we've found to be compelling.

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

I'd say we'd be more reactive than proactive on the M&A front.

Akshay Jagdale - Jefferies LLC

Thank you. I'll pass it on.

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

Thanks, Akshay.

Operator

Thank you. Our next question comes from Amit Sharma of BMO Capital Markets. Question, please.

Amit Sharma - BMO Capital Markets (United States)

Hi. Good morning, 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)

Alex, I've got a couple of quick clarification, and then I have two for you. (38:16) You said $0.02 impact from the stock, so you were talking about $0.02 negative impact, right? And then, can you also quantify any impact from hurricane in the quarter?

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

Yeah. So, I think, we're aligned. The $0.02 impact that I quoted, the results would've been $0.02 better had we not had the headwinds that we described. And the two items that I netted to get to the $0.02, one was the impact of the Emerald issues that we've been describing. Those were offset by incentive adjustments related to that underperformance on Emerald and that nets to get you the $0.02, so hopefully that was clear.

In terms of the service and distribution costs, we obviously don't break that line item out explicitly. I'll tell you from a run rate standpoint as a percent of net sales, it was about 70 basis points higher in the quarter than it was versus prior year. So, that'll give you a sense of the order of magnitude. If you think on a trailing 12-month basis, it was the highest in September, it was the highest that we've seen all year. So, it was a significant impact.

Amit Sharma - BMO Capital Markets (United States)

Got it. And then, as we think about the cost saving program that you have lined out, Stockton is one thing. Can you just talk about anything else? I mean, you just gave us a very detailed analysis, just maybe a couple of months ago. So, not expecting major changes, but any other insight into what maybe going better or maybe going slower than what you had laid out to us back in September? And then, lastly, on top line expectation, I may have mistaken it, but it sounded like you're a little bit better. At the Analyst Day, you said you are expecting to be below category in the near term, and today, Alex, you said you were expecting it to be in line with the category for 2018?

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

Okay. I think what my guidance has been on growth is at or slightly below the category. So, I may have forgot the slightly below part on this call, but I don't think our expectations have changed meaningfully. We are not – we're focused on profitability, we're focused on net price realization, and we're focused on SKU rationalization, and we're not – we're trying to be appropriately pragmatic that those may have an impact on the significant growth that we've demonstrated historically, but we'll recover from that over time.

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

And, Amit, to your other question, as you can imagine right now, we're in the process of rolling up our budget and our plans for fiscal 2018 as a company. And as we're diving deep into those specifics and really, moving into the next level of execution phase in the transformation, I'm feeling increasingly confident about that outlook in terms of all the varied initiatives. It's one thing to lay them out and talk about them at a high level, it's entirely another to deliver against that once you get to execution. And again, as I mentioned, as we're now beginning to see some of this unfold and the execution phase starts to accelerate, I'm feeling increasingly confident about our prospects.

Amit Sharma - BMO Capital Markets (United States)

Got it. Thank you so much.

Operator

Thank you. Our next question comes from Michael Gallo of C.L. King.

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

Hi. Good morning.

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

Hi, Mike.

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

My question is just on the Lance brand. I mean, obviously, you had a terrific quarter. I was wondering if you can speak to a little bit more about some of the drivers, what we should expect for that business going forward, and how you can take some of the learnings, some of the successes you had on the marketing side and start to apply them to the other brands. Thanks.

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

Yeah. That's a great question. I mean, first and foremost, we launched a TV campaign in the Southeast on the brand, which is one of our, if not our most developed and strongest market, or series of markets, and we were quite pleased with the outcome. I don't recall another time in the past when the brand has done television, it may have years ago, I don't recall having heard that, but we were very happy with the equity campaign across all the mediums I've described earlier. And I think the lesson for that is that this brand does respond to equity building activity, which means to the extent that it continues to do so, it should help continue to improve our base velocities, which in turn would help improve and support the strength of our gross margin profile.

So, feel really good about that, and I'm hopeful that that same approach will bear out on our other brands as well. I will say that of course, we're considering some of the conditions that exist in the market vis-à-vis DSD, we did attempt to capitalize on that, and believe that we've made some sustainable improvements from a base business perspective as well. So yeah, I think that's probably the highlights on it.

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

That's very helpful. And then follow-up for Alex. I know you parsed out some of the logistics impacts. I wasn't sure if you dimensionalized out of those impacts what you saw is the more sustainable piece and then how we should think about logistics costs going forward in terms of what kind of increases we should expect? Thanks.

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

Yeah. So clearly, the biggest impact in the quarter was the hurricane, then followed by fuel. I think, we're just now beginning to see the impact of driver shortages, and the extent that that will have an impact on the industry longer term. So, we're working to mitigate that actively. I think it will require some structural shifts in our network, and how we can figure our network, it will likely require some conversations with customers on how we deal with that cost, because I do think that's an inflationary cost that is just real.

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

Okay. Thank you.

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

Thank you.

Operator

Thank you. I show no further questions in the queue at this time. Thank you, ladies and gentlemen for attending today's conference. This concludes our program. You may all disconnect. Good day.

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

Thank you.

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

Thank you.