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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

Sarah Miller

Scott Van Winkle - Canaccord Genuity, Research Division

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

W. Andrew Carter - Stifel, Nicolaus & Co., Inc., Research Division

Annie's (BNNY) Q1 2014 Earnings Call August 8, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Annie's, Inc. first quarter earnings conference call. [Operator Instructions] This conference is being recorded today, Thursday, August 8, 2013. I would now like to turn the conference over to our host, Ed Aaron, Senior Vice President of Strategy and Investor Relations. Please go ahead, sir.

Ed Aaron

Thank you, Sharelle. Good afternoon, everyone. Thank you for joining us for Annie's Fiscal 2014 First 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 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 and uncertainties described in the Risk Factors section of our filings with the SEC, including our most recent annual report on Form 10-K. Such risks include risks relating to competition, new product introductions, our growth strategy, our brand, reputation, product quality, our product liability claims, and recall and related insurance proceeds, economic disruptions, changes in consumer preferences, 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 let me turn the call over to our CEO, John Foraker. John?

John M. Foraker

Hello, everyone, and thanks for joining us today as we report our fiscal first quarter results. Q1 was a strong retail execution quarter for Annie's. At retail, our positive trends continued in mac & cheese, with all sales channels contributing solid double-digit growth. We also experienced incremental strengthening in a number of our categories, most notably Cheddar Bunny crackers and Bunny Grahams. As a result, our total consumption growth accelerated to approximately 20% versus the high-teens growth trend experienced over the prior 2 quarters. These trends demonstrate that our brand is becoming more relevant to consumers and that our strategies are working.

We continue to innovate in both new and existing categories, expand and improve distribution and engage with consumers in an authentic and a highly targeted way.

For the quarter, net sales increased 14% to $39 million, and we achieved adjusted diluted EPS of $0.13, up from $0.12 in last year's Q1. Our Q1 net sales growth lagged consumption as a result of 2 timing factors, which were magnified by the seasonally small nature of our first quarter. As we discussed on our last earnings call, the timing of shipments ahead of Easter Holiday benefited our fourth quarter 2013 sales at the expense of our first quarter. Second, sales in the quarter were impacted by an inventory drawdown at our largest customer associated with their implementation of a new inventory management system. We estimate that these 2 factors accounted for substantially all of the difference between consumption growth and net sales growth in the quarter.

In addition to strong consumption numbers, the cadence of our sales is encouraging and gives us confidence in our ability to deliver and achieve our full-year financial targets. We saw a trend of sequential improvement in our monthly sales throughout Q1, and we have seen further strengthening in the early part of Q2, which is a seasonally strong quarter for Annie's.

We are looking to continue this momentum in the coming months as we benefit from our recent innovation efforts, continued distribution growth and exciting retail programs.

Due to the timing of our product launches both this year and last year, innovation was a more modest contributor to net sales growth in the first quarter. We expect sales from new products to provide a greater tailwind to our growth for the balance of the year.

Fiscal 2014 marks the year of accelerated innovation for Annie's as we will, for the first time, have 2 new product platforms to support our growth. In late June, we began shipping our new microwavable mac & cheese cups. While still too early to gauge consumption, retailer acceptance has been quite strong and initial orders are well ahead of our expectation. We've already secured over 15,000 points of distribution for micro cups, and sales thus far have been highly incremental to our base mac & cheese business. The products began showing up in key retailers in July, and early consumer feedback has been positive. We expect our offerings to bring many new consumers into this part of the mac & cheese category, offering a great growth opportunity for Annie's and our retail partners.

Today, we announced our newest innovation in frozen with our entry into the family-size segment of the frozen entrée category with the launch of 4 items: Lasagna with Meat Sauce, Classic Mac & Cheese, Shells & White Cheddar with Chicken and Butternut Squash Mac & Cheese. Our selling proposition in this category is compelling. Family-size frozen entrées is a nearly $3.5 billion category that's dominated by a large conventional brand and lacks some established authentic natural organic offering. Our products position us with a unique premium product that delivers great consumer value, and most importantly, they taste great. We believe the all-family appeal to Annie's brand, combined with our strong equity in mac & cheese, positions us to capitalize well on this significant white space opportunity. Our new entrées are expected to ship into more than 1,700 Target stores later this month, a little bit earlier than we expected, and we are actively presenting these items to retailers in all of our key channels as well.

Summer is a seasonally slow period in the frozen pizza category, but we continue to work our way back on shelf and we have plans in place to accelerate our growth in the second half of the year. Our recent consumer research indicates that repeat consumption of Annie's pizza is strong and validates our unique competitive position in the category. As we approach the seasonally stronger selling months for frozen pizza beginning in our third fiscal quarter, we will be working hard to drive increased trial by utilizing creative marketing and promotional tools that better emphasize our unique consumer value proposition in this category.

In snacks, our Cheddar Squares and Bunny Grahams are proving to be successful items. Both have gained a solid distribution foothold in the national channel and are already among Annie's highest velocity items in their respective categories. These items have been key drivers of category growth in the natural channel, with Squares accounting for over 50% of the growth in the snack and sandwich crackers subcategory, and Grahams contributing over 60% of the growth at the graham crackers segment. Our traction in the natural channel and the mainstream appeal of these products gives us confidence in our ability to expand both Squares and Grahams in the conventional channels. We've begun to build distribution of these items in grocery and mass retailers, and we expect to see continued progress in the coming months.

While we are pleased and encouraged by our current position and recent trends in snacks, we also believe that we've only scratched the surface of our overall opportunity with our existing products, let alone new innovation. We have a number of important initiatives underway in our pipeline that will help us take our snack business into an even higher level in coming years.

The back-to-school selling season is now in full swing, and we have a slate of great merchandising and marketing programs in place to support the business. One important back-to-school initiative worth highlighting is Rock the Lunchbox, a collaborative marketing effort and for the 4 leading natural brands: Annie's, Honest Tea, Organic Valley and Stonyfield to provide a free online resource that delivers ideas, inspiration and nutritional advice for parents, just in time for back-to-school. We are very confident in our growth prospects, and we continue to invest heavily in both people and infrastructure to provide the capabilities we need to ensure solid execution. We are reaffirming our fiscal 2014 guidance, including net sales growth of 18% to 20%, and adjusted diluted EPS of $0.97 to $1.01. Additionally, based on strong consumption trends and a positive start to our second quarter, we also anticipate that net sales growth for the first half of the year will be within our full-year guidance range.

With that, I'll pass it over to Kelly, who will provide more detail on our first quarter results and outlook. Kelly?

Kelly J. Kennedy

Thanks, John, and thanks for joining us today as we report our fiscal first quarter results. To provide better visibility into our normal operating performance, we're discussing adjusted financial results today, which exclude the effects of the pizza recall and costs associated with the registration filing.

Reconciliations between our GAAP and adjusted results can be found in our press release, and are also available on the Investor Relations section of our website.

For the quarter, we incurred $260,000 additional cost associated with the pizza recall. We expect future recall-related costs to be nominal. In addition, while we did not receive any additional insurance proceeds in the quarter, we continue to expect that our insurance provider and other third parties will cover the majority of our recall-related cost.

Now turning to first quarter performance. Net sales were $39 million for the quarter, up 13.8% over the first quarter of fiscal 2013. Volume was the largest driver in our year-over-year growth, with approximately 2% in growth coming from higher average selling prices. Due primarily to the shipment timing dynamics that John alluded to earlier, our largest customer represented 24% of net sales in Q1, compared to 28% of net sales in last year's first quarter. This shift was most apparent in our meal shipment, which grew 12.9% year-over-year, well below consumption growth.

Our snacks business grew 17.5% year-over-year, consistent with our trailing 12-month growth trend.

Dressings, condiments and other posted 8% growth, reflecting strong sales to both dressings and condiments in the quarter. Note that cereal is no longer a comparison factor in our dressings, condiments and other business, as we locked our exit from the category during the fourth quarter of fiscal 2012.

Turning to profitability, adjusted EBITDA for the fourth quarter was $4.4 million, up 7% over prior year. Adjusted gross margin for the first quarter was 38.4%, down 190 basis points versus last year's first quarter. While we expected gross margin to be down due to input cost inflation and higher trade spending to support new product introductions, the decline was a bit more than we expected due to an approximate 50-basis-point impact from mix. We expect the year-over-year growth margin headwind from Q1 to continue in the second quarter, albeit to a lesser extent. We currently expect second quarter adjusted gross margins to decline by approximately 100 to 150 basis points as we make significant investments to support the launch of micro cups, particularly slotting, which on a year-over-year basis, will impact margins by over 50 basis points. Note that while we've increased our Q2 slotting budget to reflect strong initial orders for micro cups, we have not significantly changed our full-year slotting forecast. We continue to expect gross margin expansion in the second half of the year, as inflation and slotting investments moderate and as we realize savings from our fat rabbit efficiency initiative.

Adjusted selling, general and administrative expenses increased by approximately $1 million over the prior year's first quarter to $11.3 million, but declined as a percentage of revenue by 100 basis points to 28.8%, in line with our expectations. Adjusted net income for the quarter was $2.2 million, while adjusted diluted EPS was $0.13. Our first quarter income tax provision of approximately 40% was favorable to the prior year by 90 basis points, but was in line with our expectations. Diluted shares outstanding decreased by approximately $250,000 year-over-year to $17.4 million as dilution from stock option exercises was more than offset by our repurchase of 500,000 shares in March.

Turning to the balance sheet. Q1 was a strong cash flow quarter. Operating cash flow for the quarter was $3.1 million, up from $1 million in last year's first quarter, enabling us to finish the quarter in a virtually debt-free position.

Turning to our fiscal 2014 financial expectations. As John highlighted, we are reaffirming our full-year guidance, which calls for: 18% to 20% adjusted net sales growth, adjusted EBITDA in the range of $31 million to $32 million, and adjusted diluted EPS in the range of $0.97 to $1.01. We continue to expect a full year tax rate of 40% to 41% and a diluted share count of approximately 17.5 million.

With that, I'll turn it back over to John for his concluding remarks.

John M. Foraker

Thanks, Kelly. Overall, I'm quite pleased with where we are at this point in our fiscal year. Our brands' current momentum in the marketplace is stronger than at any time since our IPO in March 2012. We are well-positioned against important consumer trends towards health, retailers are increasingly adopting natural and organic offerings in their stores and our team and culture are much stronger and deeper than at any point in our company's history. We're laser-focused on executing at a high level through the remainder of this fiscal year in order to achieve against our short- and long-term strategic objectives for the business. We look forward to updating you on our progress as the year progresses.

Before I close, I'd like to note that we will be participating in the Canaccord Genuity Growth Conference on August 15, and the Barclays Back-to-School Conference on September 4. We hope to see many of you there.

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

Question-and-Answer Session

Operator

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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Kelly, your cash balance, it's down about $13 million over the last 9 months. Your working capital reached the high point in at least a few years, this quarter. And it came from receivables not inventories, so it wasn't the de-load. Not a big deal, but I'm just curious how to think about your working capital needs and cash trends going forward, if you could maybe help with that?

Kelly J. Kennedy

Yes, we expect stronger cash build over the course of the year. You'll note that we typically build cash in the fourth quarter and in the first quarter of our year, as these receivables come down, that's just based on Q4 being our largest quarter. There is not a material change, overall, in our working capital need. Certainly, you'll have noted that we have, in particular this year, you'll see higher inventory levels than we carried last year. You'll have noted that we are coming into Q2, in particular, better positioned than we did coming out of Q1 last year. And that is, as well, a little bit -- puts us a little bit higher working capital needs this year over last year.

Ed Aaron

Ken, this is Ed. Just to add on to that, as you went through the quarter and John talked about it in his prepared remarks, we saw incremental strength through the quarter. So the fact that we had strong growth in the month of June contributed, somewhat, to the receivables change this quarter as well.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Great. And then, John, I realize Nielsen doesn't measure everything for you guys, but your pizza distribution, at least in, measured channels has maxed out both in terms of ACV and TDP[ph] and at that same level prior to the recall. So I'm just curious, is that the level that you were looking for? Is it maybe a little lower? And I know, we're not -- like I said, not seeing all the, necessarily, the right channels in our data. But can you help us understand maybe what needs to be done if you did want to drive it higher to get to that next level?

John M. Foraker

This is really, this last quarter is really not the time of the year where you can gain significant pizza distribution. If you recall, when we launched our Made With items last year, a lot of the distribution that we were getting was people doing plug-and-pull, kind of, out-of-cycle. So what we're seeing in pizza is we've seen -- in the natural channel, we're seeing very strong distribution growth and really strong velocity and nice performance there. That's tracking pretty nicely. We're doing really well in Target on a small base of distribution, but putting up good numbers there. Where we think -- we think that we're in a good position going into the back half of the year to drive higher ACV levels in broader grocery. And we just need to do that in the context of category reviews. But overall, we feel good about pizza. We clearly have the pause button set on it, and had to kind of rebuild ourselves. But we have a good plan for the rest of the year, and we're optimistic about how the pizza business is going to contribute, not only this year, but just as part of our platform going forward. And I'd like to underscore something that was really important in the commentary. We did some really good research this last quarter, which really validated that we've got a unique proposition, and we're seeing very strong repeat with consumers who were trying the product. So we know they love it, which we believe going in, we know they'll repeat if they tried it. Now we just need to build the distribution out, drive the right package through the back part of the year to build a bigger business there.

Operator

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

Robert Moskow - Crédit Suisse AG, Research Division

I just wanted to make sure I understood the difference between the shipments and the retail trends. And just to make sure that those 2 things that you all mentioned were really the 2 factors, the inventory reduction at that key customer, and I believe, there was one other thing. So is there anything else that would explain that difference? And to what extent do you think you will -- I guess, Easter was the other one. To what extent will you ship above consumption in the second quarter or will you -- not really expect to ship above consumption in the second quarter?

Ed Aaron

Rob, it's Ed. So we think the entire difference between our shipment growth and consumption growth was really attributable to those 2 factors, one being the pull-forward from Easter, and the other being this kind of an inventory adjustment that we think is short-term and kind of more onetime in nature. And the Easter shift we talked about last quarter and the other piece, it was probably a couple of points of our growth for the quarter that -- in terms of the impact.

John M. Foraker

And then, I'll take the forward part. So we made the point to call out that we expect the full first half growth to fall within the lines of our full year-guidance, 18% to 20%. And effectively, what we're implying there is second quarter growth in the range of 21% to 25%. And we did see some acceleration in consumption as we called out this quarter. Our overall consumption environment right now is very fertile, we're seeing good strong trends across our -- but I don't want to call an exact number out prospectively, but we are optimistic about how the products are turning in-store. So we're expecting to have a solid second quarter that will set us up for a strong full year.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. So what was the one small issue? I think that you said was a little bit worse than you expected in the quarter. Everything else seem to fall in line, but what was a little bit behind?

John M. Foraker

In terms of the 2 factors you mentioned before, the timing issues with our customer? Is that what you're after?

Robert Moskow - Crédit Suisse AG, Research Division

I think Kelly mentioned something about the mix, maybe, was a little bit weaker than you thought.

John M. Foraker

Oh, yes. Go ahead.

Kelly J. Kennedy

They're actually, the price and mix was the margin impact. We went in expecting to be about 100 to 150 basis points down, we have called that in our last call for Q1 and Q2. We were a little bit, just because of the mix, some of the softness we saw was in some of our highest volume product. So it was just a slight margin impact in Q1. And to put it in perspective, certainly, Q1 is our smaller quarter. So small changes can be impactful. But the 2 effects that Ed mentioned were responsible, overall, for the shortfall in the difference between consumption and our shipment.

John M. Foraker

And just to -- we called out that consumption growth on the meals side -- or not consumption, but the shipment growth on meals side was a little lower, impacted by this timing difference in the customer inventory de-load. A lot of that is mac & cheese, it's one of our higher margin, most mature businesses. And so that's a short-term kind of mix issue that we expect to correct through the rest of the year.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. Then, last question is about the launch of this family-size frozen items. John, these items are going to -- are they in the traditional channel or they're just in an organic natural channel first and then, you'll go into traditional later? How are you [indiscernible] them?

John M. Foraker

These items -- yes, the family-size frozen meals is really a mainstream category. The category really doesn't exist in the natural channel. We are launching the first items into 1,700 Target stores, as we've it mentioned earlier, that's happening later this month. And we're out presenting those items and expect them to build into mainstream grocery over the remainder of the year. We're certainly seeing strong interest in those items from the traditional natural channel as well. But we think the items can go in all those places that we, traditionally, see strength.

Robert Moskow - Crédit Suisse AG, Research Division

What kind of velocity do these items have to be able to deliver in order to justify their shelf space in these types of retailers?

John M. Foraker

We, generally, are positioned, as you know, in and near kind of the natural organic items in frozen, certainly in pizza, and even in some of our categories in mainstream grocery that we haven't integrated into the mainline aisle yet. So we believe that we're going to be able to deliver velocities that are going to sustain solid distribution gains in those items. If you look across frozen in general, some of those frozen categories are -- have historically been quite weak. A lot of the competition is from -- at the low end. And really, the only bright spot across many frozen categories is natural and organic, and consumers looking for healthier, cleaner products. So we're positioning ourselves in a big category with some unique products, which we think will do really well. And we'll know once we get consumption and see how the distribution builds, but we do think we've got a unique white space opportunity.

Operator

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

Sarah Miller

This is Sarah Miller on for Bill. Just had a couple of questions. First, on the new for Annie initiative, can you kind of talk about, as you're transitioning from those 1,700 Target stores into grocery over the balance of the year, what's kind of the reset schedule for the frozen category into grocery? Are you going to kind of run into the same issues where -- with pizza, where it had some maybe not the most advantageous shelf space right away and then, kind of moved into more ideal space? Could you just kind of give us some more color on that?

John M. Foraker

No, we're -- there's some reset coming up later this year, and after that as well. The way to think about it is we're being very targeted with where we want to take it. This is exactly what we did with pizza. In the case of pizza, we had some retailers bring it in outside of regular retail -- reset schedules, which did cause us to have some less than optimal placement at shelf. We've learned from that, we're really going to be focused on getting it in the right spot, building a really strong story and building it out over time. And we'll see. We think the product's great, it's positioned well, the research is really solid and we're going to get it out there, here, in Target and some other retailers. And we'll really get some good learning on how it's going to do. But we think it's part, a really solid part of our long-term for Annie strategy, and we're excited about it.

Sarah Miller

Okay. And then, just one other question on the micro cups. Did the micro cups add any significant growth to meals? I know you said they started shipping out in late June. So just kind of how that's going to play out over the balance of the year.

Kelly J. Kennedy

They did, micro cups did start shipping very late in the quarter. They weren't material, overall, to our growth in the quarter. But over the balance of the year, we are seeing a lot of the distribution gains happening in Q2, which we're very excited about. It's very early. So certainly, as get in, we'll start to see some consumption data against micro cups. But at this point, we are not necessarily calling out overall growth impact with micro cups yet for the year.

John M. Foraker

One of the exciting things about micro cups is we clearly expected that it would be a unique and differentiated new item that should do very well in mainstream channels. And that is clearly playing out. We have great distribution in Target and a lot of grocery stores. But one of the surprising things has been the uptake from -- and interest from really important natural retailers. And we think there's a really strong opportunity there. So that's a really great platform that gives us the opportunity to sell in really strong innovation right up against a really big distribution footprint that we already have, and a lot of equity in mac & cheese. And so that initiative is certainly doing better than we had hoped originally, and we just need to stay behind and drive it the rest of this year, and we're going to do that.

Operator

[Operator Instructions] And our next question comes from the line of Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity, Research Division

Following up on an earlier question about meals, and you mentioned interest in the natural channel from retailers, but it wasn't really a category that existed in natural. Do you think -- I mean, I assume you're expecting good customer response. You can create this category, can't you? And doesn't that become a platform for future products?

John M. Foraker

Yes, there's a general rule in the natural channel, products that are microwaved, typically, aren't really well-developed. And so you are right, if we can build it out and we can create a loyal following for microwave-quick, on-the-go, healthy, clean type products that consumers are interested in, then, we should have a great growth opportunity. Absolutely.

Scott Van Winkle - Canaccord Genuity, Research Division

Great. And Kelly mentioned that the customer inventory shift had an impact to the meals mix. Did the pull-forward into Easter, did that also have an impact on the meals mix?

Kelly J. Kennedy

It was not as impactful, no. It was more impactful -- the second impact, which was the inventory de-load, was more impactful on our meals than the shift was.

John M. Foraker

And I'd like to just add to that. On the inventory de-load and the switch-on of this system, overall, we think that's actually a very good thing for our business. The distributor that's doing that is making a very smart move for their business. And it's actually going to be very helpful to our business as well because as shipments line up to consumption consistently over time with that large customer, it's going to allow us to be a lot more efficient in our supply chain, it's going to reduce inefficiency spoils. So we applaud it. It actually causes, of course, a little ripple in our Q1. But we've always been very focused on retail consumption here. That's the most important factor. And we've seen -- the shipments are coming back around, as we exited the Q1 period with pretty low inventory levels at that customer. So we feel like the impact of that is really behind us now, and it's going to be a good long-term thing for our business to get that system up and running.

Scott Van Winkle - Canaccord Genuity, Research Division

Great. And then lastly, I know as Bob has asked this earlier, about the addition on the frozen meals. But do you see any difference in your ability to achieve a price premium in this particular category, obviously not compared to any mature single-serve mac & cheese business but to the rest of your product category?

John M. Foraker

When you say meals, are you referring to the new frozen entrées we're just launching or are you referring to the micro cups? Can you clarify?

Scott Van Winkle - Canaccord Genuity, Research Division

The new frozen, the new 4 frozen items.

John M. Foraker

Yes, we've done a substantial amount of research. We're certainly going to be pricing at a premium to the conventional items that are out there. The full SRP in grocery would be, we'll put these items in the $8.99 to $9.99 range. There will be a number of retailers that will be at lower numbers than that. But we do believe that we can attract a premium. Consumer research has showed us that. If you look across our innovation in really all of our categories, over time, we've proven that we can do that. And that is our thesis, and we hope to prove that out.

Scott Van Winkle - Canaccord Genuity, Research Division

One more, if I could, John. You mentioned microwave seeing a lot more interest in the natural channel, the microwave cups, than you expected. Are there any other channels where the convenience aspect of this product changes the interest level? I'm thinking drugstore channels or something where convenience is more key?

John M. Foraker

Absolutely. There are -- channels that are really focused on convenience-type like drug and C-store and food service and the kinds of stuff you buy out of the pantry in the hotel and eat in your room at night. But those -- we, historically, have not had a lot of products in our portfolio that would really appeal to that audience. But we do see channel expansion opportunities over time as we build that platform out. And we know, in drugs for example, there's certainly a much greater interest in natural organic than there has been in the past, and it's continuing to build. So we don't have any specific call outs for that at this second, Scott. But it's clearly something that we've thought about and it will be part of our longer-term plans.

Operator

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

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

Just on the microwavable cups, it may be too early for you to really comment, but I'm wondering if you have made any assessment in terms of the incrementality of that on your business, and to what degree there may be some cannibalization going on? And then, is there also an opportunity here with these cups to reach kind of a different demographic? I'm not sure if these appeal to kind of an older consumer, but is that an opportunity with this offering as well?

John M. Foraker

Yes. So there really is an incrementality to this product. We studied this segment of the mac & cheese business for some time. It's really a lot of different usage occasions. You have a lot of people bringing it to work, you have a lot of people eating a quick meal before they head out into a baseball game or the gym. We do have a business in microwavable single-serve product, as you know, where you rip it, open it up, pour it into a bowl and microwave it. That's not a big business for us. So to the extent it's going to have any cannibalistic impact, it would most likely be there. But we don't expect very much. And then, in terms of the demographic profile, one of the strategies which we've talked about in the past, is the opportunity to expand and age up the offerings of Annie's to appeal to older teens and consumers and young adults, as well as to more all-family occasions. More all-family occasions is obviously, kind of, where family-size frozen entrées is headed, but with single-serve microwavable mac & cheese cups, you're really aiming at a teen and young adult audience that is very incremental to what we're doing right now in our box businesses. So we think it's going to be a good fit and it will give us the opportunity to -- as I mentioned earlier, not only potentially expand this in different channels, but also to really increase our consumption with consumers that are a little out of the sweet spot for our basic box mac & cheese item.

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

Okay. The only other question I have is just around gross margin. I think last quarter, you talked about full-year gross margins, I believe, flattish. Clearly down first half and then, up second half. Does that still hold given some of the commentary around Q1, and a little bit of a carryover from some of the mix impact in Q2 as well?

Kelly J. Kennedy

Yes. So I'll take that, Jon. Our margin outlook, as we've highlighted, we expect stronger margins in the second half of the year. We haven't updated our full-year margin outlook. But 3 major impacts going on that we had already kind of disclosed -- 2 of -- first, commodity inflation. We do expect to be just slightly less than the second half of the year than the first of the year. We also mentioned that the actual timing of the fat rabbit is -- were heavily weighted towards the second half of the year, so there's no change there. The only slight change is the shift in timing on slotting, and the impact in moving up spend, particularly around product innovation that's been moved a little early in the year. It's not incremental to the year, it's just a change, and a lot of it is related to the micro cups, and the micro cups coming in so strong in terms of distribution in Q2. We're just entering a major buying season, so we don't have a lot of new news versus when we spoke last on commodities. There's no -- there's been no change, kind of, in our outlook on what commodity costs are going to be. But certainly, as we get into the buying season and our next call, we'll be able to speak in more detail to that.

Operator

Our next question comes from the line of Chris Growe with Stifel, Nicolaus.

W. Andrew Carter - Stifel, Nicolaus & Co., Inc., Research Division

This is Andrew in for Chris. We just wanted to know how the new frozen products will, kind of, be launched? Kind of what sort of ACV progression you're looking for? Should we expect the mainstream channels, and how will this interact with your attempt to build distribution with pizza? Are retailers just more inclined to take those 2 products together?

John M. Foraker

We're not outlining any specific targets for mainstream distribution on those items. We're taking them selectively to the right kind of grocery retailers, where we think we'll get the right placements and we can really be successful. Our focus there is building out the business in Target, which we've already disclosed, building these items out in our core natural food retailers, where we think there's a great opportunity to build a tier in the category that doesn't exist. And we're going to build it out that way. We do have some retailers who are very interested in merchandising the brand, pizza and the meals close to each other. We have other retailers where there's really no relative connection to the 2 that are there in the separate segments. So it remains to be seen. But we do believe that having more -- having these items and having them out with the right retailer is going to give us bigger scale and capability to continue to drive awareness with consumers that we are in the frozen section. And we think, we continue to believe that's a really great place for us to play over the long term to really build out our business with these families that are interested in more opportunities from Annie's that are focused on convenient food for their family.

Operator

[Operator Instructions] And we have a follow-up question from the line of Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Sorry if this was asked, Kelly, but did you break out volume and pricing again?

Kelly J. Kennedy

We did. For the quarter, 2% of our gross was pricing.

Operator

And there are no further questions in the queue at this time.

John M. Foraker

Okay. That's it. Thank you, everybody. We really appreciate you joining. And we look forward to seeing you at the upcoming conferences.

Kelly J. Kennedy

Bye, everyone.

Operator

Ladies and gentlemen, this concludes the Annie's, Inc. First Quarter Earnings Conference Call. If you would like to listen to a replay of today's conference, please dial (303) 590-3030 or 1 (800) 406-7325, with the access code 4634035. We thank you for your participation. And at this time, you may now disconnect.

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