Bnny F2013-2Q

Corrected Transcript
30-Oct-2012
Annies, Inc. (BNNY)

Q2 2013 Earnings Call
Total Pages: 20
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Annies, Inc. (BNNY)
30-Oct-2012
CORPORATE PARTICIPANTS
Erica Abrams
Kelly J. Kennedy
Co-Founder & Managing Director, The Blueshirt Group LLC
Chief Financial Officer & Treasurer, Annie's, Inc.
John M. Foraker
Chief Executive Officer & Director, Annie's, Inc.
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Jon R. Andersen
Scott Van Winkle
Analyst, William Blair & Co. LLC
Analyst, Canaccord Genuity, Inc.
Rachel Naseem Nabatian
Christopher R. Growe
Analyst, Credit Suisse Securities (USA) LLC (Broker)
Analyst, Stifel, Nicolaus & Co., Inc.
Edward Aaron
Bill B. Chappell
Analyst, RBC Capital Markets Equity Research
Analyst, SunTrust Robinson Humphrey
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MANAGEMENT DISCUSSION SECTION

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Annie's, Inc. Second
Quarter Fiscal 2013 Earnings Conference Call. During today's presentation, all parties will be in a listen-only
mode. Following the presentation, the conference will be opened for questions. [Operator Instructions] This
conference is being recorded today, October 30, 2012.
I would now like to turn the conference over to Erica Abrams of The Blueshirt Group. Please go ahead, ma'am.
......................................................................................................................................................................................................................................................
Erica Abrams
Co-Founder & Managing Director, The Blueshirt Group LLC
Hello, and thanks for joining us today as we report financial results for the second quarter of fiscal 2013. Joining
me on the call today are John Foraker, CEO, and Kelly Kennedy, CFO, of Annie's. I will now present our
comments on forward-looking statements.
Some of the statements we make during this conference call are forward-looking, including statements concerning
our positioning for future growth; investments in areas of strategic focus, including continued innovation,
increasing demand and consumption trends for natural and organic food products; and our expectations
concerning market position, financial performance, and operating information.
The forward-looking statements made on this conference call are based on management's current expectations as
of today's date only, and are subject to uncertainty and changes in circumstances, and are therefore subject to
significant risk. We cannot assure you that future developments affecting us will be those that we have
anticipated. Actual results may differ materially from those expectations. Our reported results should not be
considered an indication of future performance.
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There are many potential risks and uncertainties that could cause actual results to differ from our current
expectations, as well as those risks and uncertainties included in the Risk Factors section of our filings with the
SEC, which are available on our Investor Relations portion of our website at annies.com and on the SEC website at
sec.gov. Additional information is also available in our annual report filed on Form 10-K for the fiscal year ended
March 31, 2012. All information provided in our release and in the attachment today is as of October 30, 2012,
and we undertake no duty to uptake this information for any reason unless required by law.
Certain financial measures that we use on this conference call, such as adjusted net income, are not prepared in
accordance with GAAP and have been adjusted to eliminate the impact of certain non-recurring, expired, or noncash expenses or charges, as the case may be. Our GAAP results and reconciliation of GAAP to non-GAAP
financial measures can be found in our earnings press release.
This conference call is being webcast, and an archive of the webcast will be available on the Investor Relations
section of our website, at annies.com. It's also available live at this time.
Now I will turn the call over to John. Please go ahead.
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John M. Foraker
Hello, and thanks, everyone, for joining us today as we report our fiscal 2013 second quarter financial results. We
know it may have been difficult for some of you to make this call today, so we're really grateful for your
participation. We hope that you, your families, and friends are all safe.
Our strong second quarter results were driven by robust consumer trends and execution of our proven growth
strategies. We achieved 20% top-line growth, or $46.7 million in net sales, and adjusted net income of $4.2
million, or $0.24 per share. In light of our strong growth in the first half, current sales momentum, and our
confidence looking ahead, we are now raising our full-year sales guidance from a prior range of 16% to 19% to a
new range of 19% to 21%.
In the second quarter, we continued to focus on our four strategic growth drivers: first, expanding mainstream
distribution; second, improving placement locations in stores; third, increasing Annie's brand awareness and
household penetration; and finally, continuing to deliver exciting innovation that our consumers love.
We made good progress during the quarter in each of these areas. The consumer opportunity for natural and
organic alternatives remains very strong. More and more consumers are seeking cleaner and simpler food options
for their families.
Against this favorable consumer backdrop, we continue to experience strong consumption trends. During the
quarter, we saw year-over-year consumption growth in our key product categories, retail channels, and top
customers that was in the mid to high teens, very consistent with our trends over the last three quarters.
Our mainline initiative, where we are moving our best-selling items out of standalone natural sets and into
mainline grocery aisles, progressed nicely. During the quarter, we made significant progress against this initiative
placing approximately 17,000 SKU points of distribution in grocery mainline sets. About two-thirds of these
placements were moved from natural sets to mainline sets in the same store. The remaining placements were
incremental points of new mainline aisle distribution.
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Our mainline wins were most heavily focused in macaroni and cheese, primarily because we've been making that
case to retailers for a longer period of time. During the quarter, and Annie's macaroni and cheese consumption
grew by more than 20% in grocery and mass channels, clearly benefiting from improved placement, deeper
distribution, more competitive price points, and stronger merchandising.
We are gaining similar traction in our other product categories, such as grahams, snack crackers, fruit snacks, and
dressings, and we expect to benefit in the future as a result.
Our second quarter is a big merchandising period for Annie's and our retailers around consumer back-to-school
programs. We experienced very strong retailer merchandising and consumer response to these programs across
all of our channels, particularly for mac and cheese. In fact, August was our single-largest sales month in company
history. That was followed by continued strength into September, so much so that unfortunately we experienced
some shorts on our top items during the last three weeks of the quarter. As a result, we were unable to fill
customer demand, which we estimated cost us about $1 million in net sales in the quarter.
This had nothing to do with either availability of ingredients, aggregate production capacity at our manufacturing
facilities, or our ERP implementation. Simply put, our forecasting and production planning processes
underestimated demand in the quarter, and we were slow to adjust and catch up. We've taken a number of
corrective measures to improve the process going forward, and our customers have been very supportive. Fill rates
are now back to normal high levels and business as usual.
Now I'd like to provide you an update on the progress of our innovation execution. In January 2013, we will begin
shipping two line extensions to our snacks business. We are presenting these items and products to retailers at
this time, and the reception thus far has been very good.
The first extension is in our grahams category. We are introducing two certified organic SKUs of conventionalstyle flat graham crackers. Flat grahams, like the ones you make S'mores with, are more than a $150 million
segment of the $330 million U.S. grocery graham category, and this is a segment in which we do not presently
compete.
We have a great opportunity to position a cleaner, healthier, certified organic alternative to the mainstream
conventional brand. This extension will be incremental and gives us the opportunity to expand our graham share
in all channels.
The second extension is in our cracker business. We are introducing a line of certified organic and made-withorganic cheddar squares. This familiar product form represents more than 30% of the $1.2 billion snack cracker
category in U.S. grocery. Our new cheddar squares will age us up into more all-family usage occasions, particularly
with teens and millennial consumers. Again, we have a nice opportunity here to position a cleaner, healthier
alternative to the mainstream brand leader.
Both products deliver great taste, and based on our testing, Annie's consumers are very excited by them. We
expect solid and incremental sales contribution from these line extensions going forward in coming years.
In Frannie, our frozen category initiative, we continue to make solid progress. We began shipping made-withorganic rising crust pizza into more than 2,500 highly targeted grocery points of distribution in the second
quarter, about a quarter ahead of our expectations as we entered the year. Our goal with the initial placements is
to build a strong track record of success with each account such that we are well-positioned to expand our
distribution footprint with these retailers as we go into our fiscal 2014.
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In addition, we've begun selling these items to independent natural foods retailers with great success, and we
expect to have a large distribution footprint in the natural channel by the end of our fiscal year.
Retailers in all channels are enthusiastic about these new pizza offerings. We are pleased with the retail price
points we are securing and with the strong overall retailer support we are receiving for this important growth
initiative. Because of the strong reception we've received to our initial launch of pizza, we remain optimistic about
the potential for Annie's in frozen. While it is only the beginning, we are seeing very encouraging initial velocity
reads from early placements that have been made-with organic pizza items.
As a result of our success thus far, we are actively developing additional products for other frozen categories that
we expect to bring to market in the 2014 and 2015 timeframe. We will keep you updated on the progress of these
initiatives over coming quarters as we get closer.
We are pleased with where we are through the first half of the fiscal year and our first six months as a public
company. We are making good progress in the development of our business, and we are confident in our outlook
and our strategic initiatives.
I'm particularly proud of our people, and thank them for their continued hard work, our many accomplishments
this quarter and year-to-date, and most importantly for their commitment to Annie's mission and values.
Now I'll turn the call over to Kelly Kennedy for more financial details about the quarter.
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Kelly J. Kennedy
Thanks, John, and thanks for joining us today as we report our second quarter financial results. As John
highlighted, net sales for the quarter were $46.7 million, up 20.1% over the second quarter of fiscal 2012. Similar
to Q1, volume was the largest driver in our year-over-year growth, driving it approximately 17%, with the balance
coming from higher average selling prices.
As a reminder, we completed a secondary offering during the second quarter, which resulted in one-time costs of
approximately $700,000, or $419,000 net of tax. There were no proceeds received by the company and no change
to our share count. Throughout my prepared remarks today, I'll discuss our financial results excluding these onetime costs associated with the secondary offering.
Adjusted net income for the second quarter was $4.2 million, or $0.24 per adjusted diluted share. This compares
to $3.6 million, or $0.22 per adjusted diluted share, in the same period a year ago. EPS in the second quarter was
based on our diluted share count of 17.7 million, as compared to an adjusted diluted share count of 16.2 million in
the same period a year ago. The share count increase was primarily due to the 950,000 shares issued in the IPO in
April, combined with approximately 400,000 shares from stock option exercises year-to-date.
In the second quarter of 2013, we accelerated the rollout of our made-with-organic pizza products, which
increased costs by approximately $400,000 overall in the quarter. We had promotions and slotting fees that
impacted gross margins, as well as other marketing expenses in SG&A. The net impact to the bottom line for the
quarter was approximately $0.01 per share. This small investment will benefit us in fiscal 2014 and beyond.
Our effective tax rate in Q2 was 40.5%. We expect our full fiscal year 2013 tax rate to be 40.7%. As we discussed on
our last call, this is higher than we had originally planned.
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Now I'd like to share some color on our net sales result by product category for the second quarter. 47% of net
sales were from meals, up from 43% in prior-year second quarter, reflecting 31% year-over-year growth. Meals
growth was predominantly driven by our mac and cheese line, but also benefited from sales of organic and madewith-organic pizza.
41% of sales were from snacks, up 17% over the prior year's quarter. We saw a strong rebound in snack sales
versus the prior quarter, which was impacted by the mix of business towards meals. 12% of sales were from
dressings, condiments, and other. Over time, we expect this category to contribute less to growth as we experience
more growth in meals and snacks. As a reminder, you can find quarterly net sales trends by product category on
our website in the Investor Relations section.
Now moving to margins, gross margin for the second quarter was 38.3%, up 190 basis points over the prior-year
second quarter. The year-over-year increase was primarily related to trade efficiencies as we continue to improve
the effectiveness of our promotional programs, and was partially offset by the margin impact of slotting and
incremental trade programs made in the quarter to support our made with pizza launch.
As a reminder, we experience volatility from quarter to quarter in our margins based on product mix and timing of
promotions. We still expect margins in the mid-39%s for the fiscal year.
We are experiencing higher commodity costs in fiscal 2013, which we planned for. We implemented a pricing
increase of approximately 3%, which took effect this month, and laps a similar-size increase from October of 2011.
We also expect modest increases in key commodity prices in fiscal 2014. We expect to continue to offset higher
commodity costs with pricing and our Fat Rabbit projects, as we have in recent years.
Now turning to adjusted selling, general, and administrative expenses, where we have both fixed and variable
components, in the second quarter, adjusted SG&A increased $2.8 million to $10.8 million. SG&A spending in
fiscal 2013 reflects the planned increases in investments we are making in people, infrastructure, our brand, and
innovation to drive growth and to support our public company status.
Adjusted operating income for the second quarter was $7.1 million, up 16% over the prior year. Adjusted operating
margin for the second quarter was 15%, bringing us to an adjusted margin of 13% year-to-date.
Turning to our cash flow, we generated $9.1 million in free cash flow this quarter. As a reminder, our asset-light
hybrid supply chain model is efficient and generates a strong cash return on invested capital. We ended the
quarter with $14.6 million in cash on our balance sheet.
The free cash and our cash balance was somewhat higher than we expected because of lower-than-typical
inventory levels and the tax benefit from stock option exercises year-to-date. We spent $274,000 in capital
expenditures this quarter, primarily related to investments in our Fat Rabbit projects.
In closing, we are pleased with our solid financial performance in the second quarter. Strong consumer trends,
combined with a continued focus on our strategies around distribution, placement awareness, and innovation
continue to overdrive our top-line results. As a result, we are increasing our full-year net sales guidance to 19% to
21%, which reflects fiscal 2013 net sales in the range of $168 million to $171 million.
We expect adjusted net income in the range of $14.2 million to $14.5 million, which represents year-over-year
growth in the range of 25% to 27% on an equivalent tax basis. The new adjusted EPS range for fiscal 2013 is $0.79
to $0.82, which reflects a tax rate of 40.7% and 17.9 million diluted shares outstanding.
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Relative to our original guidance, the higher expected tax rate reduced EPS by $0.02 per share this year. Over
time, we are confident in our ability to deliver stronger operating margins and higher net income and EPS
leverage.
Now I'd like to turn the call back over to John for closing remarks.
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John M. Foraker
Thanks, Kelly. I'm happy to report that retailer and consumer interest in natural and organic has ever been higher.
We are in the early innings of our opportunity to build mainstream distribution on our existing items and to grow
our brand footprint with exciting innovation. Our strategies are working.
As an organization, we're growing fast, and we're culturally committed to continual improvement and winning for
our shareholders, business partners, employees, and consumers. We're excited about the opportunities that lie
ahead, and we look forward to reporting more to you in the coming quarters. Thanks.
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QUESTION AND ANSWER SECTION

Operator: Thank you, sir. [Operator Instructions] Our first question is from the line of Jon Andersen with
William Blair. Please go ahead.
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Jon R. Andersen
Hi. Good morning, everybody.

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John M. Foraker
Hi, Jon.
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Kelly J. Kennedy
Hi, Jon.
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Jon R. Andersen
Good afternoon, I should say. I wanted to start out by asking you about just some of the key two of four key
growth drivers. John, you talked about the focus on improving distribution in mainstream doors as well as
improving the location of your products within existing doors. Could you just give us a little bit better sense of
kind of where you sit today with respect to those initiatives? I'm trying to understand kind of what inning are we
in and how much opportunity is left there in the base business. Thanks.
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John M. Foraker
Sure. Sure, so we're in the early innings. The way to think about it is in two ways; first, in terms of depth of
distribution on our existing items. Our best-distributed item is our purple box macaroni and cheese product,
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which right now is in the high-60% ACV range in U.S. grocery. The next item in that line would be in the mid50%s approximately. There's a significant drop-off below that. And when you look at our other new product
categories or newer product categories over the last five to seven years, most of them are at ACV levels on the best
item that are in the 30%s. So we see significant opportunity to go deeper in mainstream grocery.
And second, and very related to that, we talked about in this quarter the impact of moving items, SKUs over from
natural sections into mainline aisles. That's been an initiative that we've been working very hard on for the last 18
months is really, really bearing fruit. And it's bearing fruit not only because we're doing a really good job
communicating the retailer story and the consumer story and why the products will deliver incremental sales
growth, incremental profitability, and category outperformance for the retailer, but also because we're just we're
in the right place at the right time.
Most of the big chains in the U.S. are actively seeking opportunities to develop better and bigger business
opportunities with the natural and organic-inclined consumer, which, as you know, tends to have a higher income.
They tend to be more loyal to the stores they shop, and they've got a really profitability basket. So we're seeing a
lot of success in moving into the mainline aisles. And when we move into the mainline aisles, very often we're
expanding our ACV footprint opportunity with the chain because, lots of times, the natural sections somewhat
delineate a smaller universe of stores you can get in within that chain.
So we think we're in the early innings of that. The other thing, Jon, is that the innovation that we've been doing
over the last few years and are continuing to do is benefiting from this same trend. So, as we're going in and
resetting in the mac and cheese category, delivering strong results, it's creating a narrative which is true that is
spreading through the chains, that that opportunity exists in other categories where we have our strong brand and
can represent the same growth opportunity for consumers. So we've had success more and more over the last
couple quarters in particular at selling that same story and growth opportunity to retailers in categories like fruit
snacks, snack crackers. So we think we've got a long way to go, and we're very early.
And then the other thing is we have a very deep innovation pipeline. We mentioned that we've talked a lot about
frozen pizza, and I made it clear in my opening remarks that frozen pizza was really just part of much broader
strategy for Annie's in frozen. And we see the same opportunity in those categories as well, positioning Annie's as
the national and organic, cleaner, more premium alternative to the mainstream brand, that appeals to this
consumer's need and desire for better products that they feel better about giving their family. And so I think you
can view our business as a cycle of innovation, coming in, securing that position in the category, and building out
distribution, and both those strategies work well together. So I think we're in the early innings.
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Jon R. Andersen
Thanks for the color on that. I had one question on pizza. Can you help me understand where you are right now in
terms of the distribution for pizza, where you kind of expect to be, I guess, by fiscal year-end, and then, are there
any thresholds or any milestones you need to reach on pizza before you embark in other categories in frozen?
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John M. Foraker
Sure. So I'll give you a little more color on where we want to be by the end of the year, and we'll certainly talk a
little bit more about this on our next conference call, as we get more and more information on how the items are
performing and how the distribution's rolling out. But as I mentioned on the last call and as I reiterated this call,
we've been targeting a list of about 25 top retailers across the country that we think have the right BDI, brand
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development index, category development index for pizza, stores where we can create a great footprint of initial
distribution to build out a success story.
So, by definition, we're going to these chains, and we're not necessarily saying we want to be in all of your stores.
In fact, in most cases, we're saying we want to be in this universe of your stores. We began shipping into about
2,500 of those stores during the second quarter. We continue to knock down additional chains and expect to
knock down more through the third quarter. The pace of store resets will slow down a little bit in the third quarter
because we're ahead of the major category resets for frozen pizza, which will be in our Q4.
So we'd expect this 2,500 stores, plus the build-out in natural that I mentioned, to really take hold in Q3. We will
add some incremental stores in Q3 for sure. And then that sets us up really well for Q4 to deliver strong
performance at retail, a great story with the retailers, and then a big distribution expansion opportunity as those
resets for their main annual review get done.
It's important to note and just remind everyone that the distribution that we're picking up in grocery stores for the
most part on this 2,500 SKUs is coming outside of the normal category review windows. And that's happening, as
I've mentioned before, because the retailers are so excited about these products they wanted to bring them into
their stores earlier. That's a very good sign. It creates some challenges for us because, as we get into the sections,
sometimes our placement's not optimal because it hasn't been a full category reset, but rather a bit of a plug-andplay where they're pulling items that are underperforming out and putting Annie's in.
But, as a general rule, we're getting the price points we want. We're getting a lot of really good facings. We have
some work to do to improve our placement in some of the chains in terms of getting off the bottom shelf and
getting off of our side of the box, but we expected that. And so far the retailers have been very positive on how
we're doing.
By the end of this fiscal year, we expect to have significantly more distribution than we have now, and we hope to
see and we expect to see really strong retail performance through the whole rest of the year. I mentioned and
really wanted to imply we have seen some very strong early velocity results on the products, which we expected,
frankly, because they've tested so strong and we've seen the certified organic items perform exceptionally well
where they are. So I'd say we are on track, Jon, and that hopefully gives you a good idea how we see the year
rolling out.
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Jon R. Andersen
Yeah, it does. I appreciate it. Just one more quick one, the guidance revision on the top line was more than we saw
on the bottom line. Did something change in there? Is your gross margin expectations lower because of some of
the slotting and incremental investment in pizza?
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Kelly J. Kennedy
Yeah, Jon, this is Kelly. We still expect our margins to be in the mid-39%s, so that's similar to what our
expectations were previously. Two things I'll point out is that we do have some headwinds with the tax rate. We
went into our original guidance with an expected tax rate of 39.5%. We now have a good handle. We've bumped up
to a higher federal rate. So our current tax rate estimate is 40.7%, so it cost us about $0.02.
If you actually look at our net income, we have tightened the range slightly. On a tax-equivalent basis, it's 20
while we've raised the top line's at 19% to 21%, net income growth is 24% to 27%.
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The only additional thing that I think we highlighted in our call is that we do have some incremental spend for this
year to support pizza because we are supporting it for three quarters. However, we are dynamically managing our
budget and we have done some shifting. And we do expect to deliver for the year slightly improved-very similar to
what we've been mentioning-slightly improved SG&A leverage over fiscal 2012 on an adjusted basis, as well as
having higher-slightly improved operating margin as well.
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Jon R. Andersen
Okay, great. Thanks for the color, guys. Appreciate it.

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Operator: Thank you. And our next question comes from the line of Rachel Nabatian with Credit Suisse. Please
go ahead.
......................................................................................................................................................................................................................................................

Hi, there.
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John M. Foraker
Hi.
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Kelly J. Kennedy
Hi, Rachel.
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Hi. So my question is regarding dressing and condiments. I know that you guys said that it's going to be less of a
contribution as the other categories increase as a percent of your total sales. But just looking at the Nielsen data, it
looks like growth for this category has been accelerating, especially in the last month. So I was kind of just
wondering if there's anything in particular that's causing that and what your strategy with the category is going
forward.
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John M. Foraker
Yeah, sure. So I would caution you to really look at 12-week data. On a four-week basis, there can be volatility in
our numbers up and down just because of the timing of promotions year-over-year.
However, your basic premise is definitely correct. We've seen strength in our dressing business. We've been
focusing on building out more mainline distribution on dressing, making sure we have the right assortment and
the right price points, and we're seeing the benefit from that. We also believe that just generally improving
consumer confidence and consumers feeling a little bit better about their pocketbook is also helping them in this
category trade up. So we're very pleased with what we're seeing there. We're still managing that business for
modest growth and strong profitability, but we are seeing better-than-expected top-line trends than we would
have predicted earlier this year.
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Kelly J. Kennedy
And the total category as we report, in terms of dressings, condiments, and other, and while looking flat and/or
down, we are lapping against the cereal discontinuation, which happened in the fourth quarter of fiscal 2012. If
you exclude cereal, we were up that category was up in a double-digits, consistent with what we saw last quarter.
......................................................................................................................................................................................................................................................

Great. Thanks, guys.

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John M. Foraker
Yes.
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Kelly J. Kennedy
Thank you.
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Operator: Thank you. And our next question comes from the line of Ed Aaron with RBC Capital Markets. Please
go ahead.
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Edward Aaron
Hi. Good afternoon.

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John M. Foraker
Hi, Ed.
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Kelly J. Kennedy
Hi, Ed.
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Edward Aaron
Hi. You mentioned in your prepared remarks having missed some sales because demand was stronger than you
expected. I know you referred to it as kind of your top-selling items. Can you be a little bit more specific on where
you left sales on the table in the quarter?
......................................................................................................................................................................................................................................................
John M. Foraker
Sure. It was mainly in macaroni and cheese, across our macaroni and cheese business, Ed. There were a few top
snack items where we saw some shorts as well.
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But, basically, the way to think about it, as we looked at what happened versus what we expected is we went into
this quarter with a much stronger footprint of distribution on our macaroni and cheese business, not only higher
ACV levels than prior year, which we obviously knew, but a lot more mainline distribution and much greater
retailer participation in the brand in giving us strong secondary merchandising opportunities.
And so when we went into July and August, we saw extremely strong macaroni and cheese business in that August
timeframe. And really early in the month of August it was very clear that we were going to shatter all records in
macaroni and cheese. And, unfortunately, we did not respond quickly enough to ramp the production up in our
manufacturing facility to be able to catch that demand before the end of the quarter. So we shorted a number of
customers across our top SKUs in macaroni and cheese, particularly in the last three weeks of the quarter.
And it's regrettable, and we absolutely could have done better. I'll take credit and call out when I think we've
executed well, but I'm also going to be very honest when we don't execute well, and this is an area where we could
have done a lot better in the quarter. I guess it's a good problem to have, to have very strong demand like that, but
we should have just executed better.
So we've taken a number of steps to make sure that we can avoid this kind of problem in the future, and I'll
mention a couple of those right now. We've relooked and reworked a number of our forecasting processes
internally. We also are subjecting our production planning to much more rigorous external management review.
The third thing we've done is that our manufacturing partner is actually adding a second smaller macaroni and
cheese facility into the same facility where we manufacture all of our mac and cheese products. And what that line
is going to allow us to do, it's going to allow us to do much faster cutovers on smaller secondary items that we're
maybe running short on so that we don't have to do major changeovers on our main line. Our main line is a very
high-speed line that can crank out huge volumes. And so when we stop that line to cut over to do a flavor
changeover, we're really reducing our efficiency.
The fourth thing we're going to do is that we're going to be much more careful and we're going to carry modestly
higher inventory levels on these very high-velocity SKUs, particularly as we go into key merchandising periods.
Back-to-school would be an example of a key merchandising period. Going into our Q4 timeframe and into the
February/March timeframe would be another one. We don't think it'll wrinkle the total inventory numbers
dramatically, but another $1 million or $2 million, most likely, on those items would be a good place for us to
invest in capital, so we're going to do that.
......................................................................................................................................................................................................................................................
Edward Aaron
Great.
......................................................................................................................................................................................................................................................
John M. Foraker
But the net effect was, if you really step back and look at it, our growth rate for the quarter would have been
between two and three points higher had we executed well, and unfortunately we didn't.
......................................................................................................................................................................................................................................................
Edward Aaron
I understand. Thanks. And then as a follow-up, I know that small-dollar changes can impact your financial metrics
quite a bit, but I'm just trying to better understand the drivers of the SG&A de-leverage in the quarter. What were
12
Annies, Inc. (BNNY)
30-Oct-2012
the I know you addressed it briefly in your comments, but what were the biggest contributors of the higher
costs? And then, also, how should we think about kind of your ratio of fixed versus variable SG&A components?
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Yeah, the de-leverage was expected. We knew that the spending pattern on SG&A for this year was going to look a
little different than last year, mainly because, in fiscal 2012, so much of that investment was in the second half of
the year. Of course, as we move into the second half, we'll start lapping against those spendings a little in Q3 and
particularly in Q4.
But I do want to remind people that we have more than a third of our SG&A is variable, and that includes our
freight and warehouse, our commissions, and a portion of our marketing spends. And so I think as we move into
having much stronger top line, a portion of that does roll down to our SG&A. With that said, as we highlighted, in
our pizza spend, a portion of that was in marketing spend that we moved up. It was planned later in the year, and
we had moved it up into Q2, so we did have some incremental spending, that was more than we originally
anticipated, to support the pizza made-with launch in the second quarter.
......................................................................................................................................................................................................................................................
John M. Foraker
But we do expect stronger leverage in the second quarter, and in fact, that's implied in our guidance.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
In the second half of the year.

......................................................................................................................................................................................................................................................
John M. Foraker
In the second half, thank you.

......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Yeah.
......................................................................................................................................................................................................................................................
John M. Foraker
And we expect that the second half of the year and into next year as well.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Yeah, and the total SG&A overall, our expectations are similar, that we'll have slight leverage for the full fiscal year
over fiscal year 2012.
......................................................................................................................................................................................................................................................
Edward Aaron
Thanks, everyone.
......................................................................................................................................................................................................................................................
13
Annies, Inc. (BNNY)
30-Oct-2012
John M. Foraker
You bet. Thanks, Ed.

......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Thank you.
......................................................................................................................................................................................................................................................
Operator: Thank you. And our next question comes from the line of Scott Van Winkle with Canaccord Genuity.
Please go ahead.
......................................................................................................................................................................................................................................................
Scott Van Winkle

Hi. Thanks. I missed it if you gave it. What was the timing on grahams and cheddar squares? Is that this quarter?
......................................................................................................................................................................................................................................................
John M. Foraker
We are actually actively out presenting those to retailers right now. The first shipments will be in early January.
That's our plan.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
So fourth quarter.
......................................................................................................................................................................................................................................................
John M. Foraker
Fourth quarter, beginning of our fourth quarter.

......................................................................................................................................................................................................................................................
Scott Van Winkle

Gotcha, gotcha. And when you have obviously, you talk about slotting this quarter with pizza. When you have a
fairly meaningful new product effort coming in Q1 of next year, shipping grahams and cheddar squares, should we
be on the lookout for higher slotting around those launches?
......................................................................................................................................................................................................................................................
John M. Foraker
Well, we will definitely spend some slotting on those launches, Scott, in Q4, but that's baked into the guidance that
we've just reiterated, and it won't be a material number overall, shouldn't be.
......................................................................................................................................................................................................................................................
Scott Van Winkle

Gotcha. And then if we look at last year, Q3 of last year was a real strong growth quarter. Can you remind us what
was the driver behind that?
......................................................................................................................................................................................................................................................
14
Annies, Inc. (BNNY)
30-Oct-2012
John M. Foraker
It was off the top of my head, it was higher levels of distribution on macaroni and cheese, some expansion in the
mass channels, basically just solid execution of the same four strategies that we've been talking about here for
quite some time.
......................................................................................................................................................................................................................................................
Scott Van Winkle

Gotcha, so you're not cycling against some new product or something of that nature?
......................................................................................................................................................................................................................................................
John M. Foraker
No, no. It's core base business growth that drove all of our growth last year, really; key items, expanding
distribution in all channels, and also strong acceleration in consumer trends which we really started seeing. We
were at a good level, but we ticked up to a higher level in Q3 last year, so it was really this last four quarters we've
seen a continuation of very consisting consumption growth.
......................................................................................................................................................................................................................................................
Scott Van Winkle

Great.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
And the promotions we run, Scott, tend to be very similar year-over-year. There's no major shift. There are small
shifts in timing based on where holidays fall sometimes, especially when they come at the end of a quarter, but
overall, our general pattern this year is looking very similar to last year.
......................................................................................................................................................................................................................................................
Scott Van Winkle

Great. And then could you give us a little detail on kind of the specifics behind the higher-than-expected tax rate?
Was there something you were expecting to come through that didn't come through, and is this a level we should
think about for subsequent years?
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Yeah, this is definitely the level. We just ticked up to the highest federal tax rate. And we also did have had, if
you recall, I was talking a little bit about the shift to our customer pickups that are at our distribution center in
Illinois, we've had a shift over time with a little bit more concentration at Illinois, which is one of the highest state
tax rates when you apportion there for net income. But this is we don't expect any higher. This is a level where
we could only in the future, if we had any tax-beneficial programs, could come off just slightly, but this is good
rate to expect. And mainly, we're just really getting better, and we finally have dialed in and we feel like we have a
good handle on the tax rate, and I think, coming into the year, the federal tax rate jumped up on us.
......................................................................................................................................................................................................................................................
Scott Van Winkle

Q
15
Annies, Inc. (BNNY)

30-Oct-2012
Great. And then, John, do you have any comments on next week's vote on Prop 37 in California and any
implications if it were passed for Annie's?
......................................................................................................................................................................................................................................................
John M. Foraker
Sure. Well, the only comments I have is that we've been strongly in support of it. The fundamental proposition
requires labeling of genetically modified foods, and we think that's in the consumers' best interest to have the
information and make their own choices. We've looked at it, and if it passes, I think it's safe to say that it's very
likely to be held up in litigation for a long time.
We here in California are used to initiatives passing and having them be held up in the courts for some time. I
think our assessment is that if it does pass, it will be a net positive, clearly, for natural and organic products and
GMO-free products. The issues for us to watch out for are making sure that we're in a good position with respect
to the supply chain, if there's an acceleration in demand for some of those items, as bigger companies may switch
over. We don't really know the outcome right now. We're hopeful it'll pass, but there's an incredible amount of
money being spent against it right now, so I'd call it probably 50/50 at this point.
......................................................................................................................................................................................................................................................
Scott Van Winkle

Great. Thank you very much.

......................................................................................................................................................................................................................................................
John M. Foraker
You bet.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Thank you.
......................................................................................................................................................................................................................................................
Operator: Thank you. And our next question comes from the line of Chris Growe with Stifel, Nicolaus. Please go
ahead.
......................................................................................................................................................................................................................................................
Hi. Good afternoon.

......................................................................................................................................................................................................................................................
John M. Foraker
Hi, Chris.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Hi, Chris.
......................................................................................................................................................................................................................................................
Q
16
Annies, Inc. (BNNY)

30-Oct-2012
Hi. I had a question for you, first, just to better understand the sales growth guidance, and I don't know if there's a
way you can give any more color around it, but just to understand how pizza's contributing to that, for example.
And also, you had talked about these new snack products, but is that something that, now that they're out there
and developed, you add a little bit more to your guidance for those products, as well, as they ship in, in the fourth
quarter?
......................................................................................................................................................................................................................................................
John M. Foraker
Yeah, we've been conservative in what we've baked into our guidance for those items, and typically would, be
especially in your first quarter of shipments. It'll take retailers a while to approve those items and then get them
set into category review. So we're expecting some modest positive impact in Q4, but that really isn't the driver. I'd
say we are definitely expecting some stronger growth from pizza year-over-year in the third and fourth quarter in
just progressive strength. But, really, the fundamental reason that we're raising the range and feeling very
confident about where we're at is that the two biggest drivers in our business right now are expanded distribution
of our best-selling items in mainstream grocery and also getting placed in better parts of the store, as we've talked
about earlier.
The third thing, which is also really positive and we are seeing this in our business, is our core business in the
natural channel remains very strong. We've seen continuation of strong growth trends with the independent
natural foods retailers as well as the supernaturals all this year, and we feel like we're in a good spot. We certainly
took the range up. We're going to do everything we can to continue to grow the business in a solid way. And we
just think we're in a we think it represents confidence in the future and that the fact that our strategies are
working.
......................................................................................................................................................................................................................................................
Okay. And I guess somewhat related to that, I was trying to understand for you have an expectation for more of
your earnings in the second half of the year than you have historically. Is there anything to the phasing of the
year? I guess part of this is just due to the lapping of some of the costs from a year ago. Is there anything between
Q3 and Q4 we should be aware, whether it be launch costs or that kind of thing or new product costs we need to be
aware of?
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Yeah, the only thing I would point out is, you're correct, it has to do with the flow, mainly of the SG&A, over fiscal
2012 versus 2013, and for 2012, we began to make investments. We mentioned that we've added people, we've
added infrastructure, we began to incur some public company costs in the third quarter, but a little stronger in the
fourth quarter.
......................................................................................................................................................................................................................................................
Okay. And then just one final question would be in relation to some you talked about some incremental
marketing costs you pulled forward. Last quarter it was some incremental R&D costs. If you look at those items in
particular, I don't know to what degree you can talk about it for the year in rough terms, but how much of, like,
sort of incremental investment are you making this year to put behind these new products, or how much got
pulled forward earlier in the year versus the second half of the year?
......................................................................................................................................................................................................................................................
17
Annies, Inc. (BNNY)
30-Oct-2012
Kelly J. Kennedy
Yeah, we had planned the spending that we did against pizza and some of the slotting we had actually planned
for later in the year, so it was really timing that pulled them up, but overall, it is a year of investment growth. We'll
be certainly making a little stronger support of pizza. However, we are going to be looking at some other programs
and managing the dynamically managing our budget just to shift some of those dollars. So, overall, we are
we're not giving specific guidance, but we're expecting operating leverage in the second half as well as over fiscal
2012 overall. So, again, these are investments we're making that are really, the strength behind them will be in
2014 and beyond as we see some of these sales really ramp up.
......................................................................................................................................................................................................................................................
Okay. Thanks very much for your time.

......................................................................................................................................................................................................................................................
John M. Foraker
You bet.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Thank you, Chris.

......................................................................................................................................................................................................................................................
Operator: Thank you. [Operator Instructions] Our next question comes from the line of Bill Chappell with
SunTrust. Please go ahead.
......................................................................................................................................................................................................................................................
Bill B. Chappell
Good afternoon.
......................................................................................................................................................................................................................................................
John M. Foraker
Hi, Bill.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Hi, Bill.
......................................................................................................................................................................................................................................................
Bill B. Chappell
I don't know if you're willing to break it out, but just kind of because I'm looking at the meals growth, was much of
it driven by pizza, or was it really just the upside from the mac and cheese?
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
A
18
Annies, Inc. (BNNY)
30-Oct-2012
Pizza actually drove a larger portion than it has kind of previously with the made-with and organic in the quarter.
We're not breaking out the specific, but it was material to the growth in the meals category.
......................................................................................................................................................................................................................................................
Bill B. Chappell
Okay.
......................................................................................................................................................................................................................................................
John M. Foraker
The significant majority of it still is macaroni and cheese, and that business is really healthy.
......................................................................................................................................................................................................................................................
Bill B. Chappell
And I don't know the exact timing of these things, but I would think your finishing the bake-offs and excuse the
pun as you look towards the new listings for the spring reset, when will you have a pretty good idea of where
you're going to be added in and how big that could be in terms of revenue?
......................................................................................................................................................................................................................................................
John M. Foraker
We are doing a lot of bake-offs. That's a good way to put it. The way I think to characterize this is that on the last
call or at last quarter, we had really gotten through maybe seven or eight of the retailers on our top-25 grocery and
mass list that we were really targeting for these, we knew had locked them down. We've knocked down a
significant number more of those. We expect the vast majority of that list to translate over into pizza placements
before the end of our fiscal year. It's a little bit early to call the exact numbers because, oftentimes, the
presentations involve two or three rounds an initial presentation, a follow-up, some discussion of stores and
we're really working through that now. I can say that it's going really well and the response has been great, and we
think we're going to add a lot more stores.
And on top of that, I mentioned this strategy earlier, but we really believe that we have a great chance to perform
strongly in this footprint of stores that we're building right now, and if we do that, we think we're going to position
ourselves really well for the next set of reviews, which will be coming up, and a lot of those will be coming up in
the spring, February, March, April timeframe.
......................................................................................................................................................................................................................................................
Bill B. Chappell
Great. And then just I guess one housekeeping, Kelly, I'm trying to get to 17.9 million shares for the full year. It
looks like you have to have about 18 million for the next two quarters. Is that right, or is there something I'm
missing from the 17.7 million that was in this quarter?
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
No. And I apologize. I'm rounding to 17.9 million. It's 17.85 million, but it's rounding up to 17.9 million. But you're
correct, we expect to build some additional shares over the next two quarters.
......................................................................................................................................................................................................................................................
Bill B. Chappell
Okay, and that's just from options exercising?
19
Annies, Inc. (BNNY)
30-Oct-2012
Kelly J. Kennedy
Yes.
......................................................................................................................................................................................................................................................
Bill B. Chappell
Great. Thanks so much.

......................................................................................................................................................................................................................................................
John M. Foraker
Thanks, Bill.
......................................................................................................................................................................................................................................................
Kelly J. Kennedy
Thank you.
......................................................................................................................................................................................................................................................
Operator: Thank you. And I'm showing there are no further questions. So with that, we'll close the call. And if
you'd like to listen to a replay of today's conference, it will be available until midnight November 10 by dialing
303-590-3030 or 1-800-406-7325, with the access code of 4570831. This concludes our conference for today.
Thank you for your participation. You may now disconnect.
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Annies, Inc. (BNNY)

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Q2 2013 Earnings Call

Co-Founder & Managing Director, The Blueshirt Group LLC

Chief Financial Officer & Treasurer, Annie's, Inc.

Scott Van Winkle

Analyst, William Blair & Co. LLC

Analyst, Canaccord Genuity, Inc.

Rachel Naseem Nabatian

Analyst, Credit Suisse Securities (USA) LLC (Broker)

Analyst, Stifel, Nicolaus & Co., Inc.

Analyst, RBC Capital Markets Equity Research

Analyst, SunTrust Robinson Humphrey

MANAGEMENT DISCUSSION SECTION

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Q2 2013 Earnings Call

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

QUESTION AND ANSWER SECTION

Hi. Good morning, everybody.

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Okay, great. Thanks for the color, guys. Appreciate it.

Rachel Naseem Nabatian

Rachel Naseem Nabatian

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Q2 2013 Earnings Call

Chief Financial Officer & Treasurer, Annie's, Inc.

Rachel Naseem Nabatian

Great. Thanks, guys.

Hi. Good afternoon.

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Q2 2013 Earnings Call

In the second half of the year.

In the second half, thank you.

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)

Q2 2013 Earnings Call

Chief Executive Officer & Director, Annie's, Inc.

You bet. Thanks, Ed.

Scott Van Winkle

Fourth quarter, beginning of our fourth quarter.

Scott Van Winkle

Scott Van Winkle

Copyright 2001-2012 FactSet CallStreet, LLC

Annies, Inc. (BNNY)