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Annie's (NYSE:BNNY)

Q4 2013 Earnings Call

June 10, 2013 5:00 pm ET

Executives

Ed Aaron - Senior Vice President of Strategic Planning and Investor Relations

John M. Foraker - Co-Founder, Chief Executive Officer and Director

Kelly J. Kennedy - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Annie's, Inc. Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Monday, June 10, 2013. And I would now like to turn the conference over to Ed Aaron, Senior Vice President, Strategic Planning and Investor Relations. Please go ahead, sir.

Ed Aaron

Thanks, Britney. Good afternoon, everyone, and thank you for joining us today for Annie's fiscal 2013 fourth quarter conference call. With me today are John Foraker, Annie's CEO; and Kelly Kennedy, our CFO. As we begin, let me remind everyone that statements made during this conference call which are not historical facts, including any statements about the company's targets, beliefs, plans, opportunities or expectations, are forward-looking statements and are based on management's current plans, known information, estimates and projections. Our actual results may differ materially from those projected in these forward-looking statements and investors should not place undue reliance in them. Annie's does not undertake to update any of these statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties. There are a number of factors that could cause actual results to differ materially from those contained in today's forward-looking statements. Including the risk in uncertainties described in the Risk Factors section of our filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q. Such risk include risk related to our brand, reputation, product liability claims, recalls and related insurance proceeds, economic disruptions, changes in consumer preferences, competition, new product introductions, ingredient and packaging cost and availability, reliance on a limited number of distributors, retailers, contract manufacturers and third party suppliers and on an outside warehouse facility, efficiency projects, intellectual property and related disputes, regulatory compliance, transportation, supply chain, inventory levels, and seasonality. Now, our CEO, John Foraker. John?

John M. Foraker

Hello, everyone, and thanks for joining us today as we report our fourth quarter and full year fiscal 2013 results. Fiscal 2013 was a very successful year for Annie's, our first as a public company. We delivered adjusted net sales of $171 million for the year, up 21%, and achieved adjusted diluted EPS of $0.80 while making significant investments in our people and infrastructure. We believe these investments lay the groundwork to support sustainable long-term growth, well in excess of the natural organic food market.

Our fourth quarter adjusted net sales of $52.2 million increased 21.5% year-over-year and reflect a continuation of the strong sales momentum that we've experienced in recent quarters. Retail consumption of Annie's products remains very healthy, increasing again in the high teens in Q4 despite facing tougher comparisons.

Our Q4 growth was led by strength in the grocery, mass and club channels. We continue to see particularly robust growth in our natural mac & cheese business, which benefited from both improved distribution and strong retail program execution in the quarter. The fact that our largest and most established business continues to lead our growth tells us that our mainline initiative is working and that we are still in the early stages of capitalizing on this significant opportunity.

I'm especially pleased with our fourth quarter sales performance, in light of the pizza recall early in the quarter. The strong growth we saw in our base business in the quarter is a notable accomplishment and a testament to our team's sharp focus on execution.

I'm also pleased to report that we are regaining our momentum in frozen pizza. Our ACVs are showing sequential improvements in each period, and will soon be back to pre-recall levels. We also see steady velocity improvement in our made with organic pizza products, which we expect to continue over the next few quarters as we expand distribution and activate consumer and trade marketing programs.

Our bottom line results were solid and in line with our expectations. We achieved adjusted net income growth of 30% for the quarter and delivered adjusted diluted EPS of $0.29.

Before turning it over to Kelly for a more detailed financial review of the quarter, I'd like to briefly recap the progress we made against our 4 key growth strategies in fiscal 2013 and discuss key opportunities that lie ahead.

We continue to expand mainstream distribution of our products. Annie's products can now be found in over 26,500 stores across all channels, up mid-single digits from a year ago. The largest contributor to these gains was the grocery channel, where we saw approximately 9% growth in our total distribution points.

Although we saw a good distribution gains across all of our product categories in fiscal 2013, we have a long way to go. Consumer and retailer interest in natural organic products continues to increase and we are still below our long term ACV potential in each of our categories.

Improved placement locations from our mainline initiative was a key driver of the velocity growth in the grocery channel in fiscal 2013. We estimate that our consumption of mac & cheese coming from the main aisle grew at roughly twice the rate compared to mac & cheese sold from the natural aisle, and our category share when placed in the main aisle was also roughly twice as high compared to stores where our distribution was limited to the natural aisle. We look forward to building upon this momentum in fiscal 2014 by not only continuing to focus on mac & cheese, but also our other important categories such as snack crackers, grahams and fruit snacks.

Our brand building efforts in fiscal 2013 delivered strong results. Among our targeted consumer households, we saw a double-digit growth in both our aided brand awareness, which rose to 80% in fiscal 2013 and our trial rate, which increased to 60%. Our core consumer base is actively and highly engaged in the brand, and we are seeing excellent repeat purchase behavior from these consumers.

We expect this trend to continue as we further increase the breadth and availability of our product offering.

Our brand household penetration remains low at 6.6% overall, and less than 4% for our most established business, mac & cheese. In fiscal 2014, we're looking to expand our consumer reach and deepen our penetration. To do this, we'll continue to use creative and authentic brand messaging, highly targeted with powerful and effective tools like social media and PR.

Finally, in the innovation area, we launched a number of meaningful new products in fiscal 2013, including our made with organic Rising Crust Pizza, Cheddar Squares, and flat graham crackers. Consumer retailer -- consumer and retailer interest in these additions has been quite strong.

Looking ahead, we believe the growing awareness and relevance of our brand has greatly increased the potential size of our playing field. Over the past couple of years, we've invested heavily in our organization to widen the pipe and ensure we have the capabilities needed to execute at a high level so we can take full advantage of these growing opportunities. As a result, fiscal 2014 will be a year of accelerated innovation for Annie's. As previously disclosed, we remain on track to introduce additional frozen items in the second half of our fiscal year and look forward to sharing the specifics with you in the coming months.

In addition, today, we announced an exciting and highly incremental platform extension to our mac & cheese business, our entry into the single-serve microwavable cup segment. The microwavable cup segment represents approximately 20% of the total mac & cheese category and is growing at twice the rate of the overall category in conventional channels. Our offering is well-positioned to meet the growing needs of millennial consumers and we expect to bring many new consumers into the category. Our micro cups are scheduled to begin shipping broadly to important retailers in all of our channels in early July. With that, I will pass it over to Kelly who will provide more detail on our results and fiscal 2014 financial outlook. Kelly?

Kelly J. Kennedy

Thanks, John, and thanks for joining us today as we report our fourth quarter and fiscal year 2013 results. We are pleased with our financial performance for both the quarter and the year, as we continue to deliver robust top line growth well ahead of other food companies.

To provide better visibility into our normal operating performance, we are discussing adjusted financial results today, which exclude the effects of the pizza recall and cost associated with our secondary offering.

We continue to expect total cost related to the pizza recall to approximate $3 million, the majority of which we expect will be covered by our insurance provider and other third parties.

We incurred $2.3 million of expenses related to the recall in fiscal 2013, including approximately $600,000 in the fourth quarter. We expect to incur an additional $400,000 in fiscal 2014. In Q4, we also recorded $350,000 of reimbursement from our insurance provider, which partially offset the expenses we've recorded in Q4.

Cost related to secondary offerings totaled $1.2 million in fiscal 2013, including approximately $500,000 in the fourth quarter. Reconciliations between our GAAP and adjusted results can be found in our press release and are also available in the Investor Relations section of our website.

Now turning to our fourth quarter performance. As John highlighted, adjusted net sales were $52.2 million for the quarter, up 21.5% over the fourth quarter of fiscal 2012. Volume was the largest driver in our year-over-year growth with approximately 3% of growth coming from higher average selling prices.

Our fourth quarter sales growth benefited from strong seasonal retail programs. While consumption was the primary growth driver, our fourth quarter net sales also benefited slightly from shipment timing ahead of our Easter promotional period. We estimate these incremental shipments benefited fourth quarter net sales by roughly $1 million or so.

Growth in Q4 was led by 36% adjusted growth in our meals business and 18% growth in our snacks business. Sales for addressing condiments and other business declined 8% due mainly to timing-related factors. Consumption for our dressings and condiments business moderated from the strong levels seen in our third quarter, but was still up a healthy mid-single digits in the quarter.

Adjusted EBITDA for the fourth quarter was $9 million, up 34% over the prior year, reflecting strong sales growth and solid margin expansion.

Adjusted gross margin for the fourth quarter was 39.4%, down 50 basis points versus last year's fourth quarter, in line with our expectations as we cycled over a favorable trade spending adjustment in last year's fourth quarter.

Adjusted selling, general and administrative expenses increased $1.3 million over the prior year's fourth quarter to $12.3 million, but declined as a percentage of revenue by 200 basis points to 23.6%.

Adjusted net income for the quarter increased by 30% to $5.1 million compared to $3.9 million in the same period a year ago. Adjusted diluted EPS for the quarter was $0.29 based on $17.7 million diluted shares as compared to $0.24, which was based on $16.4 million adjusted diluted shares for the fourth quarter fiscal 2012. The 1.3 million share count increase reflected the 950,000 shares issued in conjunction with our IPO, which we have now lapped, as well as stock option exercises during the year. A lower than expected tax rate in the fourth quarter provided a $0.01 benefit to our EPS. Our full year adjusted tax rate was 39.6% and came in 80 basis points better than our previous forecast due primarily to Congress' decision in January to extend certain R&D tax credit, which were set to expire at the end of 2012.

Our fourth quarter tax rate reflected the full year impact of this credit, which drove a low tax rate for the quarter.

Turning briefly to our full year results. Adjusted net sales increased 21.1% to $171.1 million, led by 33% growth in meals and 18% growth in snacks. Sales of dressings, condiments and other were flat with fiscal 2012, but increased in the high single-digits, excluding the impact of our exit from cereal. Note that cereal will no longer be a comparability factor in our results, as we fully lapped our exit from this business in the fourth quarter.

Our net sales growth in fiscal 2013 was broad-based across sales channels, with grocery, mass and natural all growing in the double digits. You can find historical quarterly net sales by product category and annual net sales growth by channel on the main page of our Investor Relations website.

We achieved strong profitability as well, including adjusted EBITDA of $25.8 million, adjusted net income of $14.2 million and adjusted diluted EPS of $0.80, all company records for Annie's.

Turning to the balance sheet. As discussed in our press release, in March, we repurchased 500,000 shares in Solera, concurrent with our secondary offering, resulting in a cash outflow in excess of $19 million. Despite this large cash outflow, we finished the quarter with nearly $5 million in cash and just over $7 million drawn against our credit facility. Our strong cash flow generation enabled us to pay down our full revolver balance subsequent to quarter end. Although we do anticipate drawing on our credit facility again before the end of the first quarter to meet seasonal working capital needs.

We expect our inventory at the end of the first quarter to approximate our third quarter 2013 balance of $21 million as we gear up for what we expect will be a strong back-to-school selling season for Annie's.

Turning to our fiscal 2014 financial expectations. As we stated in our press release today, we expect to achieve an adjusted net sales increase of 18% to 20%, driven by continued strong growth in our base business and new innovation. We expect to deliver adjusted diluted EPS in the range of $0.97 to $1.01, representing year-over-year growth in the range of 21% to 26%. We are projecting adjusted EBITDA in the range of $31 million to $32 million and expect capital expenditures in the range of $2.5 million to $3 million comparable to last year's CapEx of $2.8 million.

While we expect increased efficiency gains from our Fat Rabbit projects, we expect adjusted gross margin to be in line with fiscal 2013 because of higher commodity costs and spending to support our innovation.

We project year-over-year gross margin declines in the first half of the year, followed by gross margin expansion in the second half, driven by the impact of achieved and planned efficiency projects, which are heavily weighted towards the latter half of the year.

We expect to generate some leverage in our adjusted SG&A expenses this year while continuing to invest in our brand, people and system. As a result, we expect to show modest year-over-year improvement in adjusted operating margin.

Our 2014 plan assumes a tax rate of 40% to 41%, and we are modeling a fully diluted share count of approximately 17.5 million. The expected reduction in our shares outstanding reflects the 500,000 shares we purchased in conjunction with our March secondary offering, partially offset by the dilutive impact of the expected stock option exercises in fiscal 2014.

As I alluded to earlier, strong seasonal retail programs likely pulled some Q1 shipments forward into our fiscal Q4, and we are also investing in the first quarter to support the relaunch of pizza and to drive our other new products and mainline distribution opportunities. As a result of these factors, we expect first quarter sales growth in the midteens. We continue to see strong consumption trends, consistent with our fourth quarter, and we expect sales and profit contribution from our exciting new products to increase as the year progresses.

In summary, we concluded fiscal 2013 with a strong fourth quarter and are looking forward to good growth ahead in fiscal 2014. With that, I'll turn it back over to John for his concluding remarks. John?

John M. Foraker

Thank you, Kelly. Overall, I'm very pleased with our financial performance in fiscal 2013 and in the solid progress we made against our key growth initiatives. We continue to invest in our brand, products and people in order to position the company for a long-term success. We overcame challenges during the year and grew from them, building a stronger Annie's foundation for the future. I'd like to thank each and every Annie's employee for their commitment and dedication to our mission and core values over this past year. You've made us stronger as a result.

We're optimistic about the year ahead. Broad industry conditions remain very favorable as retailers and consumers continue to adopt natural organic products into their lifestyles. Our base business is performing exceptionally well and our innovation is accelerating, too. We're confident that we can continue to deliver growth while in excess of the natural organic foods market and we look forward to keeping you posted on our progress.

With that, we'll open up the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Based on some of your cautionary comments about the first quarter, should we expect EPS to be similar or maybe even down a little bit year-on-year? 1Q '14 versus 1Q '13?

Kelly J. Kennedy

No, not down. So, we are, as we highlighted, we're guiding to down on gross margin in the range of 100 to 150 basis points but we will pick up on some SG&A so we'd be looking at being comparable in terms of an operating margin.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay. And I have a...

Kelly J. Kennedy

When you do the math, you'll see that, that does show some growth on the EPS.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

I just wanted to make sure on the timing of all that.

Kelly J. Kennedy

Sure. Thank you for clarifying.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

A couple more questions and I'll get back in the queue. 2 quarters in a row, I think, where shipments were ahead of consumption, and I know there were some Easter shift in there but is this more a function -- should we expect this going forward, this dynamic? Is this a function of maybe different ways of measuring these sales? Or how do we think about that, like I said, dynamic going forward?

John M. Foraker

Yes, so it's not unusual for our shipments to be a little bit ahead of consumption because we're building distribution and we saw very strong distribution growth in Q4. We called out the Q4 impact because we got to the end of the quarter and we were very effective at getting trucks in and picked up and we overexecuted a little bit and as we look at it, we felt that we want to be transparent about kind of where the volume for the quarter would have been if we've kind of lined it up a little bit better. But we feel like the consumption overall, the trends have been very consistent and we're seeing solid, high teens consumption growth and we're measuring on a weighted average across all channels, including the pieces of data that you can't see on the AOC data.

Ed Aaron

Ken, this is Ed. So one other thing I just need to clarify, so for the first quarter, if you adjust for the pull forward, the sales that we had in the Q4, it kind of implies a high teens growth rate, which is consistent with where our consumption is running. There are periods where you might see our shipments grow faster than consumption just based on innovation. But in the first quarter, keep in mind that some of the things that we're doing, like in -- like with the micro cups launch, don't actually hit in the quarter yet from a revenue perspective. So that's something that we expect will build later in the year.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Look at you, Ed, seamlessly moving into the role. I like it. The last question, then I'll jump back in, volume versus price mix in 4Q, did you break that out at all?

Kelly J. Kennedy

We did. It's been pretty consistent all year, approximately 3% pricing.

Operator

Our next question comes from the line of Robert Moskow with Credit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

One thing I thought was peculiar about the guidance, Kelly was talking about commodity cost being a little bit higher. Are you expecting any pricing to offset that because I never thought of commodities being a real issue for Annie's because it has a lot of pricing power.

Kelly J. Kennedy

That's right, and we've historically taken pricing in the range of 3% to 5% in any year. You'll have note we're guiding to commodity inflation pretty much comparable to what we saw in fiscal '13. However, we're not calling gross margin expansion this year. We have not announced any pricing action, but you'll note we talked pretty regularly about taking some pricing action every year. We do expect to take less pricing this year. We've also -- while we've seen some kind of softness on some of the conventional commodities, we haven't really translated yet into natural and organic commodities. So it's really the commodity inflation, which will be offset to keep us flat to last year between a combination of pricing but slightly less than what we took in fiscal '13, combined with what we call our Fat Rabbit projects, efficiency projects, which are more heavily weighted towards the second half of the year.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. So you need the efficiency projects in the back half to offset maybe a little bit of commodity inflation in the first half? Is that the way to think of it?

Kelly J. Kennedy

That's correct.

John M. Foraker

Yes. Rob, we have a list of Fat Rabbits that's very well articulated that we feel very strong that we're going to get them all. We have a good track record of executing these, and they're solid efficiency agreements which we've baked into the business going forward. We do believe that we have the ability to take pricing as needed to balance the model out. And also, you've probably heard us talk about this before, organic commodities tend to lag in terms of what's happening in the conventional commodity index. And we're in a crop cycle right now and watching that very closely, so we feel overall that we've got the levers to pull to make sure that we maintain our margins through the year and we're comfortable that were going to do that.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. And if I can ask a follow-up question, I guess, it's kind of a marketing question. In some of the natural stores that I shop at, I now see a lot of Annie's products, like many more than I would have expected. And I'm just wondering, are you monitoring those stores and are you pretty confident that all of the SKUs are earning their keep, so to speak, or are there any items that you're -- or how do you monitor whether certain items don't have the velocity to stay on shelf?

John M. Foraker

Well, we've over the years have had a pretty consistent process of evaluating and monitoring SKUs and discontinuing those that are not working or that don't have the margin profiles we like or the trends are not there. They are for whatever reason not hitting where consumers want us to be. But in the natural stores, Rob, we've always had a much broader footprint of SKUs. Because typically, in the natural stores, you'll have the products that you would likely see in conventional channels but you also have our certified organic SKUs, new innovation tends to hit natural retailers a little bit sooner than other places. And it's all part of our strategy to make sure that we're balancing our channels and really managing channel conflict as we grow and build and innovate the brand. But to come back to the basic premise of the question, yes, we're very comfortable that the items that are out there in broad distribution are performing well. We get all the data from the retail channels and are evaluating that on a monthly basis and we track, we're tracking all the data very closely.

Robert Moskow - Crédit Suisse AG, Research Division

I guess the reason I asked, John, is because you did bulk up your sales force for the independent natural foods stores, as I remember, so you must be getting more and more distribution. So you're not seeing any kind of issues resulting from that at all?

John M. Foraker

No, no. Anas the opportunities that we've seen in the independent natural accounts have been a lot of items that should've been on the retail shelf, but weren't historically. And so by putting more focus here with a really talented team, a really great broker network and some additional people, we really have been able to optimize the distribution footprint in what many people would consider to be very mature retailers for the Annie's brand. But we perform exceptionally well in those stores. We match up to the consumer really well and it's great business for us. And as a result, we've seen very strong growth trends in the natural channel all year.

Operator

Our next question comes from the line of Jonathan Feeney with Janney Capital Markets.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

You guys gave a couple of pretty helpful pieces of data here, but what you were -- you mentioned targeted consumer households, you mentioned, I think it was John's remarks, from core consumer base. And specifically, at 6.6% household penetration. Could you just give us a sense in those 3 concepts sort of where they are, what is your target market and how big is your core consumer base relative to the total number of eating households in America, which I presume is about 120, unless someone's figured out how not to eat.

John M. Foraker

Yes. It depends how you dice the target, Jonathan. So the way we generally talk about it is households that's due to income more than 50k and then when you apply a screen for psychographically whether or not they're inclined to pay more for healthy food, against that target, you come to roughly 19 [ph] million households. And we look at other brands as well and other brands that have established a very strong authentic position against mainstream consumers and also broad distribution across all channels and brands like Kashi come to mind, which are traditionally up in the high 20s in terms of household penetration. So we think that the brand can extend into those kinds of levels over time, with a combination of building out distribution as we've been talking about with our mainline initiative, as well as continue to innovate into categories that Annie's moms and dads and families are telling us that they want us to come into, to meet the needs of their -- the broader needs of their family. So an example of that is microwavable mac & cheese cups, it's a very mainstream category. By doing -- by coming to that category, we're targeting a little older consumers, teens happen to be very strong users of those items, as well as young adults who are on the go. So innovation and distribution growth and putting the brand into places where we can be relevant to this audience of households is how we're going to do it.

Operator

Our next question comes from the line of Jon Andersen with William Blair & Company.

Jon Andersen - William Blair & Company L.L.C., Research Division

Starting with '14 outlook. Would it be fair to say that you would expect shipment growth to continue to outpace consumption growth in '14 just given the continued focus on distribution and the roll out of some new products?

Ed Aaron

Jon, this is Ed. We'd probably expect a little bit of that just because of the innovation that we have coming through.

Jon Andersen - William Blair & Company L.L.C., Research Division

Okay. And is there any color you can give us on the growth rate you're expecting by segment? I mean, in the meals segment, it seems like there's quite a bit of innovation coming with the microwavable cups, skillet dinners. By the same token, there sounds like there's quite a bit of a focus on main aisle for snacks. So any help there in terms of the complexion of the growth by segment?

Kelly J. Kennedy

Sure. For fiscal '13, you'll have noted, we highlighted 33% growth on a year-over-year basis in meals for '13, and 18% in snacks, and dressings and other, flat. We expect going into '14 to continue to see more strength in meals than snacks based on both the pizza invasion, which, of course, is going -- we expect to be slightly higher in '14 than '13, as well as the micro cups. So we expect to see more strength in meals that came to what we saw in fiscal '13. We have now lapped cereal so we'll begin to see what we expect to be mid-single digit growth in dressings and other, and snacks will be, we believe as well, in the high teen range.

Jon Andersen - William Blair & Company L.L.C., Research Division

Okay. Just one more for me. The guidance for '14 appears to imply about 50 basis points or so of operating margin expansion with gross margin flat, that would obviously be coming from SG&A. I personally may have expected a little bit more in '14 given the 18% to 20% top line guidance. Are there some specific investments you're making in that SG&A line? Is marketing coming up? Other things that kind of explain that would be helpful.

Kelly J. Kennedy

Sure. [indiscernible] primarily reflects continued innovation to support growth and innovation. So we continue to talk about investments in people, infrastructure and our brand, so those will continue. In addition, we do expect a slight -- slightly higher level of investment as a percentage of net sales on the marketing line and we also highlighted higher R&D spending as a percentage of net sales, a material amount higher in fiscal '13 versus '12 and we will continue to ramp that up as well.

Operator

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

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Just wanted a little more clarification on trying to understand kind of the current trends and the pull forward and everything that goes with that. If I'm looking, and I just want to make sure I'm understanding this right, if you take out the pull forward, you're kind of talking about high teens growth in the March quarter and high teens growth in the June quarter. So that implies some significant kind of acceleration September, December, March of next year. Is that pizza? Is that mac & cheese single-serve? What's driving that? Or is that the launch of more on the -- for Annie's side, I mean, what's the big driver that will picked up that acceleration past the June quarter?

John M. Foraker

Well, we added -- we had a very successful quarter in fourth quarter, building distribution, moving items over to the main line. We also have some pretty powerful innovation that we announced today and we feel like the business is really at a place where, as we get into more and more stores and we're registering more with a broader base of consumers who hadn't easily found us before, that the opportunity for Annie's is going to be significantly increasing over time. And those are the primary drivers.

Kelly J. Kennedy

Yes. But innovation certainly between the micro cups and pizza, we do expect the innovation impact on growth to increase over the course of the year.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

But on the pizza front, I would think by now you have a pretty good idea what the resets look like going into the fall. I mean, can you give us anymore color there on kind how the tests have gone?

John M. Foraker

Yes. Sure, I can give you some color. I mean, the recall definitely hit the pause button on that initiative for us because we're out of distribution in the late January timeframe. We didn't get back into the retailers as fast as we thought we might. We got every retailer that was carrying the product said, "I'll take them immediately." but by the time you got through the shipping and the supply chain and into the retail sets themselves, it was really kind of late in the fourth quarter and you can see that in the ACV numbers in the build. And so we really weren't able to kind of put our foot down on the programming the way that we had thought we would be able to going into the fourth quarter. So we're doing a lot of that work right now and we like what we see. We're still in category reviews, but I would say -- it's fair to say that we definitely didn't get as much expansion as we would have expected pre the recall, at this window. However, it's also fair to say that the retailers that are selling the product are feeling good about what it's doing and we do expect that later in the year, we'll have some significant opportunities to expand distribution with pizza.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Okay. That helps a lot. And then 1 last question, I guess, any reason or is there a thought that the mainline initiative is not having as much impact on the snacks as it is meals, I mean, I know meals started earlier. Would you expect snacks to pick up? And then housekeeping, Kelly can you give us an idea of what tax rate and share count should be for the full year for 2014?

John M. Foraker

I'll take the first part of that. So yes, we're actively focusing on expanding mainline initiative to our other categories and we're having some good successes with that. It's inherently a little more difficult to do that in some of the mainline categories with snacks where so much of the space is driven by DSD versus warehouse. So it's structurally a little bit harder. But we do have some good plans in place and we've seen a lot of success and we do expect to make great gains there this year.

Kelly J. Kennedy

Great and just speaking quickly to your question about numbers for tax rate and share count for fiscal '14, we expect the tax rate to be in the range of 40% to 41%, so it's higher than the 39.6% in fiscal '13. And we also expect our diluted share count to be approximately 17.5 million.

Operator

Our next question comes from the line of Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Can we talk about microwavable cups? How they might impact your margins? We've seen some other companies with microwavable products, soup, for example, I know that's a much more complex product than what microwavable mac & cheese cups look like. But are they accretive to margins, dilutive to margins, can you help us out with that a little bit?

John M. Foraker

On the short term, they're going to be a little diluted to margins. We feel good about where we're starting out, with this innovation and we've got a great plan in place as it scales and as we can drive a higher volume to drive cost out. So we feel, Ken, that over time, it's going to be on our margin target. As we've historically said, it will take 12, 18 months before we start hitting the volume numbers that really drive efficiencies we look for. But because this is such a significant opportunity for us, we've spent a lot of time in the development cycle looking at that and really laying a clear roadmap out. And so we feel really good about it. I'd say about microwavable cups, this is a category that we've wanted to go into for a long time. The research has been very compelling for a long time. The development was very difficult for us, to get a product that performed to consumer expectations without all the artificial ingredients. And we've developed what we think is a fantastic offering and we believe Annie's consumers are going to really like it. And if you think of the sell story on microwavable cups, we have many retailers who perform very well with Annie's in the conventional mac & cheese business, and they know that we are bringing new consumers into the category and driving significant share as a result, and incremental profitability for retailers and the like. And the story on cost is the exact same story. And so it's been one of the most exciting introductions that we've really ever had as a company, and I've been here 13, 14 years. And so we've got to execute, we've got to make sure we stay out ahead of the demand and we've got to really drive the cost curve as we build it out, but we think we can do that.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And I have a few more if I can sneak them in. Speaking of new products, you had a few out besides pizza, right? Can you talk about, maybe, which ones are working better than expectations? And if there are any, which ones maybe are lagging a little bit? I know you've had the cheese squares, for example, and graham crackers, I'm just curious to go through those.

John M. Foraker

Sure. I'll go through 3 of them. The 3 are basically cheese squares, flat graham crackers and then we have some extensions to our dry box mac & cheese business called Bernie's Farm. So on the Cheddar Squares, they're performing really well. We've gotten a quick pickup on those in the natural channel. We're getting them out into grocery retailers as well. On a dollar sales per point basis, they're among the fastest turning items in the crackers segment for us. Not quite where the flagship Cheddar Bunny item is yet, but pretty darned close. So we think that there's a strong opportunity there. We're aging up and appealing to a little slightly older consumer who maybe doesn't want to be seen carrying a box of Bunny crackers around the house. And then on the flat grahams, that's done exactly what we expected. It was a category that we have quite a bit of equity in and the conventional flat graham cracker category is mostly full of products that contain ingredients that many Annie's oriented consumers wouldn't be pleased with. So we've now offered a certified organic offering and it's providing a lot of opportunities for consumers to trade up. So in the natural channel, we're seeing very strong velocities on those items, particularly the honey item, which is going to be the best-selling item. And we are seeing velocities in those categories which are exceeding some of the velocity of our long standing Bunny Graham items, which is great. Still early, but a lot of opportunity to build that out. And then Bernie's Farm is just our take on a licensed type product although it's really our brand. We didn't license it. We've gotten good distribution build on that in mass channels and in independent natural foods retailers and we're getting a lot of positive comments from consumers as well. We don't expect that, that item will be in our top 4 or 5 SKUs in the category but it is incremental and appeals to a household that has slightly younger kids that's looking for that kind of an experience, the fun cute shapes. So overall, we feel good about all 3 of those.

Operator

Ladies and gentlemen, this concludes the alloted time for our call today. We thank you for your participation in Annie's, Inc. fourth quarter and fiscal year 2013 earnings conference call. You can listen to a replay of today's conference by dialing (303) 590-3030 or 1 (800) 406-7325, and enter the access code of 4620817 followed by the pound sign. We thank you for your participation again today. And you may now disconnect.

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