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Annie's, Inc. (NYSE:BNNY)

Q4 2014 Earnings Call

May 29, 2014 5:00 pm ET

Executives

Ed Aaron - SVP, Strategic Planning & IR

John Foraker - CEO

Zahir Ibrahim - CFO

Analysts

Ken Goldman - JPMorgan

Robert Moskow - Credit Suisse

David Palmer - RBC Capital Markets

Bill Chappell - SunTrust

Chris Growe - Stifel Nicolas

Jon Andersen - William Blair

Mitch Pinheiro - Imperial Capital

Mark Segal - Canaccord Genuity

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Annie's, Inc. Fourth Quarter Fiscal 2014 Earnings Call. During today's presentation, all participants 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, Thursday, May 29, 2014, and at this time I'd like to turn the conference over to Ed Aaron, Senior Vice President, Strategic Planning and Investor Relations. Please go ahead, sir.

Ed Aaron

Thank you, Operator. Good afternoon everyone. Thanks for joining us for Annie's fiscal 2014 fourth quarter conference call.

With me today are CEO, John Foraker; and CFO, Zahir Ibrahim.

As we begin, let me remind everyone that statements made during this conference call that are not historical facts, including any statements about the company's targets, beliefs, plans, opportunities or expectations, such as its expectations for fiscal 2015, growth prospects, costs and competition 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 you should not rely on these statements as an assurance of --

Operator

It appears we are some technical difficulties at this time ladies and gentlemen, please standby one moment.

Ladies and gentlemen, thanks for standing by. We have speakers back online. Mr. Aaron, I will turn the conference back over to you, sir.

Ed Aaron

Thank you. And thank you for joining us for Annie’s fiscal 2014 and fourth quarter conference call.

With me today are CEO, John Foraker; and CFO, Zahir Ibrahim.

As we begin, let me remind everyone that statements made during this conference call that are not historical facts, including any statements about the company's targets, beliefs, plans, opportunities or expectations, such as its expectations for fiscal 2015, growth prospects, costs and competition 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 you should not rely on these statements as an assurance of future events or results. 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 risks and uncertainties described in today's press release and the Risk Factor section of our filings with the SEC, including our Annual Report on Form 10-K. These risks include risks related to implementing our growth strategy; maintaining our brand and reputation; product liability claims --

Operator

Ladies and gentlemen, please continue to standby we are experiencing some technical difficulties. One moment please.

Ladies and gentlemen, thank you for your patience. Please continue to standby while we get the technical difficulties fixed. Thank you for your patience.

Ladies and gentlemen, thank you for your patience. Please continue to standby. We will try and get the conference back online here shortly.

Ladies and gentlemen, thank you for standing by. We have our speakers back online. I will turn the conference back to Mr. Aaron.

Ed Aaron

Thank you, Operator, and we greatly apologize for some technical difficulties on our end. So I will start over.

Good afternoon, and thank you for joining us for Annie’s fiscal 2014 and fourth quarter conference call.

With me today are CEO, John Foraker; and CFO, Zahir Ibrahim.

As we begin, let me remind everyone that statements made during this conference call that are not historical facts, including any statements about the company's targets, beliefs, plans, opportunities or expectations, such as its expectations for fiscal 2015, growth prospects, costs and competition 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 you should not rely on these statements as an assurance of future events or results. 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 risks and uncertainties described in today's press release and the Risk Factor section of our filings with the SEC, including our Annual Report on Form 10-K. These risks include risks related to implementing our growth strategy; maintaining our brand and reputation; product liability claims; competition; new product introductions; reduced availability of, and competition for, organic ingredients and other inputs; supply chain and inventory management; our internal controls; our reliance on a limited number of distributors, retailers and contract manufacturers of our products; our acquisition of the Joplin manufacturing plant and expansion of our business model to include manufacturing; changes in consumer preferences; regulatory compliance; and seasonality.

To provide better visibility into our normal operating performance, we are discussing adjusted financial results today, which exclude the impact of the pizza recall as well as costs associated with the Joplin acquisition and secondary offering. Adjusted EBITDA also includes the effect of stock-based compensation. Reconciliation between our U.S. GAAP and adjusted results can be found in our Press Release and are also available in the Investor Relations part of our website.

And with that, I would like to turn the call over to our CEO, John Foraker. John?

John Foraker

Thanks, Ed. Hello everyone and thanks for joining us today as we report our fourth quarter and full fiscal year ‘14 results.

Fiscal ‘14 was a year of record sales and profit for Annie. We’re very proud of that. It’s also a year in which we saw changes in the national organic sector that we're well-positioned to meet recognizing they do place new demands on Annie's and our team moving forward.

Our fiscal ‘14 top-line results reflected our ability to realize growth opportunities by giving consumers high quality, great tasting products, from a brand they trust a lot. Led by continued strength in mac & cheese, we delivered adjusted net sales growth of 19% and surpassed the $200 million net sales margin.

Consumption of Annie's grew even faster up approximately 21% for the year including double-digit growth in all major channels and most of our product category. We saw continuation of these positive trends in the fourth quarter with adjusted net sales growing 16% and consumption growth growing 20% despite the later Easter holiday.

While we are pleased with our consumption trends and strong cash generation, clearly we are disappointed that bottom-line results fell short of our expectation. Despite significant SG&A leverage, earnings were impacted by higher supply chain cost that resulted in continued increases in the price of organic wheat, higher inventory obsolescence and mix changes.

In addition, our results were impacted by a change in methodology of estimating trade expenses, which reduced net sales and EPS by $0.02 on the quarter and a penny on the year. Zahir will discuss this in more detail in his remarks.

Let's spend a little more time on what happened in the quarter. As we discussed on prior calls, an unprecedented dislocation between organic and conventional wheat prices due to very tight supply conditions in the organic part of the market created significant challenges for us in fiscal ‘14. Whereas conventional wheat prices declined in our fiscal year, we experienced organic wheat inflation in the teens significantly higher than we originally expected.

The issue was most pronounced in the fourth quarter with organic wheat inflation moving even higher to approximately 20%. As organic wheat is our largest input accounting for roughly 20% of our total commodity set, the financial impact was significant. We admittedly did not do a good job anticipating the severity of this dislocation but we've learned a lot from the experience and we've taken decisive steps to be more strategic and disciplined in our sourcing efforts.

We are expanding our base of supply, deepening our relationships at the farmer level, and increasing our forward cost coverage to provide improved visibility into our supply and cost for this important commodity.

We expect further upward price pressure in the organic wheat, dairy, and other commodities in fiscal ‘15 and we plan to implement appropriate price increases which are in line with the increases we've taken prior to fiscal 2014 to help offset these higher costs.

Some of our challenges stems from our aggressive focus on driving innovation as we enter new categories, added features and benefits to existing products and took every step to differentiate our offerings among customers and channel.

As our sales performance and strong ground position demonstrate, these efforts are clearly resonating with consumers. While this rapid pace of innovation is key to our long-term growth and success and is paying off in market response. It is also a significant contributor for the inventory obsolescence and mix headwind we faced in fiscal ‘14.

We are working to enhance our capabilities to support our plan for continued growth and innovation. To this end, we recently brought in an expert resource with significant supply chain experience in the natural food sector. We added a highly experienced set of strategic sourcing and acquired strong manufacturing counter through acquisition of the Joplin plant. We are also actively searching for an SVP supply chain to lead the growth and development of our operations function.

Alongside these operational improvements, we continue to invest in talent and systems to develop our finance and IT infrastructure. In November of last year, we brought Zahir on as our new CFO. He’s been systematically strengthening the organization by focusing on step changes in our financial analytics, developing our information system, and improving our processes and internal control.

We have made key hires in the area of supply chain finance, SG&A and commercial finance, and we recently hired a talented Corporate Controller. The depth and rigor of their work seems to drive improvement in many areas.

We entered 2015 with the Annie's brand in a strong position in an industry that continues to grow rapidly. At the same time, we are positioning our company for a more competitive environment. Annie's is a trusted authentic brand that resonates with moms who have demonstrated their willingness to follow-up into these categories. Accordingly, we're in a great position for continued growth.

But we know the success in this environment requires first-rate execution, as well as continued progress for the stated growth objective and strategies which are to expand distribution and shelf presence, drive innovations and grow household penetration.

I like to spend a few minutes reviewing our progress against each of these strategies and discuss some of our key initiatives to drive continued growth in the year ahead. Fiscal ‘14 was the year of accelerated distribution growth, especially in main three channels. Annie's product can now be found in over 35,000 grocery stores or grocery super stores across all channels up low double-digit on a percentage basis from a year ago. This growth was led by continued distribution gains of Triple Box, Mac & Cheese, which now hold 74% percent ACV in U.S. grocery.

In addition to expanding our retail footprint, we are also deepening our distribution in many of retail accounts, resulting in double-digit growth and total distribution points in both grocery and mass channel. We saw continued strength in our velocities as result of our successful efforts to drive increased mainline distribution. This is great progress. Importantly, we know we still have lots of runway for distribution gain. Annie's is still significantly underpenetrated relative to our potential, especially in a grocery channel, where the average retailer carries roughly 14 of our key 23 item.

Our pace and innovation is accelerating too. Fiscal ‘14 was the most robust year for production innovation in our history. All in all, we introduced our 14 new SKUs across the portfolio, more than double the number of new products introductions in the prior year and in total new products defined as products introduced over the past 12 months, accounted for 10% of growth sales dollars in fiscal 2014, up from 7% in fiscal 2013 with solid contribution from our two new platforms Microwavable Cups and Family Size Frozen Entrees. We expect that fiscal ‘15 will be another strong innovation year for Annie’s.

Let me highlight three new innovation focuses this year. First, as we announced earlier this month, we have entered the Meal and Snack Kit category where we recently launched a major mass retailer. Second, we have plans in place to expand our frozen lineup in the second quarter, where we will be bringing the Annie's brand to the $1 billion frozen snacks category with our entry in key segments, Pizza Toppers and Mini Pizza Bagels. Third, we will be placing a significant focus on driving greater penetration of our cooking and cracker business in fiscal ‘15 by expanding mainline distribution of our new bagged snack line and by leveraging our recent Joplin manufacturing investment to pursue close-in innovation opportunities.

Through our great products and the support of our authentic and highly targeted digital and social marketing, we are driving significant increases in brand awareness, consumer trial, and most importantly household penetration. Our household penetration as measured by IOI now stands at 8.8% that is up nearly a percentage point over prior year and implies approximately $1 million from the household came into to the Annie's franchise in just the last year. That's a significant accomplishment that bodes well for the future.

We expect momentum behind the growth strategies to drive further market share gains, resulting in continued strong consumption growth. And the organization improvement that we continue to make will help us share with our shareholders benefit from this growth.

Looking ahead to fiscal ‘15, we expect strong, continued top-line growth in the range of 18% to 20%, including the impact of the Joplin plant acquisition. This was despite the impact of planned system-wide inventory reductions from our largest customer to leading natural organic distributor. Earlier last year, this customer began efforts to reduce their overall inventory. However, the full year impact on fiscal 2014 was relatively insignificant. Over the past month this customer significantly accelerated these plans and recently communicated specific operational targets to us for our coming year.

We have begun to see this in our current quarter and we estimate the full year impact on net sales in the $6 million to $8 million range translating to approximately 3 percentage points to 4 percentage points of growth. We expect a significant portion of this impact to occur in our first quarter which is our seasonally smallest dollar value quarter of the year.

I'd now like to turn the call over to Zahir to review our financial results and fiscal ‘15 outlook in more detail.

Zahir Ibrahim

Thanks, John, and good afternoon, everyone. For the quarter, we reported adjusted diluted EPS of $0.29 versus $0.27 last year. Adjusted net sales were $59.8 million for the quarter, up 16% over the prior year. For the fiscal year, we reported adjusted diluted EPS of $0.86 versus $0.78 in fiscal 2013 with adjusted net sales increasing 19% in line with our expectations to $203 million.

In terms of our underlying sales performance, volume continues to be the driver in our year-over-year growth with higher prices contributing approximately 1 point growth for the quarter.

Net sales in the quarter was led by Snacks, which increased 26% over the prior year. Our Meals business grew 11% on an adjusted basis impacted by the timing of Easter shipments year-over-year. Net sales of Dressings, Condiments and Other increased 8%.

Turning to profitability, adjusted EBITDA for the fourth quarter was $8.9 million, up from $8.3 million a year ago. Adjusted gross margin for the quarter was 34.6%, down 410 basis points versus last year's fourth quarter. The year-over-year gross margin decline was primarily the result of higher supply chain costs including organic wheat cost increases, inventory obsolescence, and the impact of innovation on our margin mix.

We also incurred higher trade spending as a result of our successful efforts to drive continued distribution and market share growth in a more competitive retail environment. For the fiscal year, adjusted gross margin declined 290 basis points to 36.4%.

Adjusted SG&A expenses improved by 380 basis points to 20.1% in the quarter driven by lower year-over-year incentive compensation cost and fixed cost leverage. For the fiscal year, adjusted SG&A improved 180 basis points to 24%.

Our tax rate for the quarter increased to 40.9% versus 38% last year as we cycled over the benefit of an R&D tax credit recorded in the last year's fourth quarter.

Diluted shares outstanding was $17.4 million, down from $17.7 million in last year's fourth quarter due to the repurchase of 500,000 shares completed in March, 2013.

Turning to the balance sheet. Fiscal Q4 was a significant cash flow quarter for Annie's. In addition to seasonally strong profitability, we made progress in improving our working capital position. As a result, we generated strong operating cash flow for the quarter resulting in $17 million in cash and no debt on the balance sheet at fiscal year-end.

Before discussing our fiscal 2015 guidance, I would like to first address an outcome of our year-end reporting process. In finalizing the fiscal '14 results we became aware of a material weakness in our internal control over financial reporting prompted by a determination that our historical methodology for estimating certain trade allowances did not include all related trade promotion costs. We have since developed and implemented an improved methodology to remediate this issue.

As a result of this change, net sales for the quarter and year were adjusted down by $600,000 and $400,000 respectively. The trade promotion and other items we identified particularly relating to accounting for contract manufacturing, coupled with an insufficient compliments of (inaudible) accounting resources within the organization led to our material weakness determination.

None of these items resulted in a material misstatement of any of our financial statements and disclosures in any of our fiscal 2012, 2013 or 2014 years. We have made revisions to our financial statements for the first three quarters for 2014 and our fiscal 2013 and 2012 statements, all of which will be included in our Annual Report for fiscal 2014.

John has given many of the steps we have taken to improve our execution and this is particularly so in the area of finance and accounting. In addition, we have taken other remedial steps including engaging an external audit firm to assist with our internal audit and internal controls function and establishing a controls committee with participation from our board members and senior management, which reports directly to our board. We believe these steps will address the issues that gave rise to the material weakness classification.

Now turning to fiscal '15 guidance. As we stated in our press release today, we expect to deliver adjusted net sales growth in the range of 18% to 20%, excluding the impact of non-core contract manufacturing revenues related to the Joplin acquisition, we expect adjusted net sales of Annie's branded products to grow in the range of 14% to 16% for the year. As John alluded to earlier, our net sales guidance assumes 3 percentage point to 4 percentage point impact from expected inventory reductions by our largest customer.

We expect to deliver adjusted diluted EPS in the range of $0.88 to $0.95 for the year, up from $0.86 in fiscal 2014. This includes an estimated impact of $0.08 to $0.12 from the aforementioned customer inventory reductions and a $0.05 impact from higher stock-based compensation expense. We also faced a $0.03 year-over-year headwind from normalized incentive compensation expense.

We expect gross margin to be comparable for fiscal 2014 with improvement in the base business offsetting an approximate 80 basis points headwind from the sale of lower margin, contract manufacturing revenue associated with Joplin acquisition. Note that the Joplin impact is consistent with our original expectations. And we continue to forecast this acquisition to be roughly neutral to adjusted EPS in fiscal '15.

Our gross margin outlook for the year sees commodity inflation in the mid-to-high single-digits, with further pressure from mix changes. This will be more than offset by pricing actions and a significant step-up in a cost savings from specific manufacturing efficiencies we expect to realize during the year. We expect SG&A expenses to increase as a percentage of sales, reflecting planned investments in people and resources to support our future growth, as well as the impact of higher stock-based compensation and normalized incentive compensation expense.

Adjusted EBITDA is expected to be in the range of $29.5 million to $31.5 million, representing 8% to 16% growth. We are assuming an effective tax rate of approximately 40% on fully diluted share count of $17.6 million.

Our earnings guidance reflects what we expect to be a challenging start for the year, Q1 in particular, followed by a strong backlog. First quarter performance is expected to be significantly impacted by the inventory reduction that John alluded to earlier, higher commodity costs, and the phasing of investment spending to support new product introductions and base business growth. We expect these factors to result in an operating loss for the quarter.

Keep in mind that Q1 is our seasonally smallest quarter. We expect second half margins to show solid improvement on a year-over-year basis, as we benefit from strong sales growth, the impact of planned pricing actions, and significant cost savings associated with efficiency initiatives and cost reduction projects scheduled for midyear completion.

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

John Foraker

Thanks, Zahir. The Annie's brand has never been stronger. And our growing consumer relevance and sales momentum put us at the forefront of companies in the natural and organic marketplace.

Management and our board continue to be intensely focused on taking all the steps necessary to see that Annie's is positioned to fully deliver on our brand substantial future potential. We hold ourselves accountable for not just fixing issues but achieving operational excellence.

Today Annie's is a roughly $200 million business. But it's clear that the future growth and size opportunity is significantly bigger than that. Our brand equity punches way above our current weight.

When I described the Annie's opportunity to our business partners, investors, and employees, I focused on five important points. First, Annie's have a long growth runway. We still have opportunity to expand distribution in each of our current categories and we have a brand that can and will travel to many new categories in the future through our innovation pipeline.

Second, consumer trends are moving in our direction, more than ever natural organic is mainstream and we are at the center of that moment.

Third, consumers love Annie's. They love the taste, the simple and sustainably sourced ingredients, and our values. We connect with them in a deep and emotional way. About a third our households today are run by millennial parents and that is expected to move to about two-thirds by 2020. That is a tectonic shift in a consumer space that is changing everything and we are a go-to brand for this next generation parent.

Fourth, our consumption trends are industry leading, running in the 20% range, driven by increases in household penetration and unit volume growth. This places our brand at or near the top in our industry in terms of growth potential.

And finally, we are power brand for retailers, driving incremental sales, profit, and bringing new consumers into their stores.

In closing, I'd like to thank our employees for their hard work, determination, and commitment to values as we work to build our capabilities and deliver against the future growth potential of this great brand.

With that, I'll turn it over to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin question-and-answer session. (Operator Instructions).

Our first question is from the line of Ken Goldman with JPMorgan. Please go ahead.

Ken Goldman - JPMorgan

Can you talk a little bit about the inventory reduction? I think your largest customer is UNFI if I'm not mistaken. Did you mention may be that this customers doing inventory reductions across the board? If so, what’s your understanding about what’s happening there? Can you help us understand which of your categories is most likely to be affected? I'm just kind of figure out how Annie's specific the reduction is and in which categories and why. Thanks.

John Foraker

Sure. So yes it's United Natural Foods. And as I mentioned in the prepared remarks, this is something that have been working on for a while through last year did not much of an impact on us. About three weeks ago you let us know very specifically what their inventory turn targets were for us across our total portfolio. There is really -- you shouldn’t really think of it as an impacting any specific product line more than others, although obviously, since our highest velocity are in the Mac & Cheese and Snacks that's what -- that's the biggest part of our business. It would be there. However, we should think of it as just kind of linear across our total business. I'll let them speak for the initiative.

In total, I'd say it’s definitely impacting us and may be more than some others because they are pretty significant part of our portfolio. We do think that it's -- from their point of view and ultimately from ours it's actually a very smart thing to their business and for ours, because it will reduce inventory in the system erratically on both sides as we get to more real time pull against demand and more predictability. And so we think it's actually not about being long-term and that's a smart business strategy. However, obviously, have kind of a one-time effect on this year that does not down our growth rate. And as you can tell has a pretty significant impact on our profitability because in a small quarter a big chunk of revenue come out like that, kind of hard to adjust to with spending plans and all those things in place, as well as benefit of pricing and productivity and all those things being a little bit more back half weighted in this year.

Ken Goldman - JPMorgan

Okay. And if I could ask one more. John, one of the questions I get on our stock is whether the board would ever be interested in selling to a larger producer? There aren’t just many pure plays MidCap, food guys like you anymore so. If your stock opens lower tomorrow, I'm sure the volume of these questions that we all get will increase. So can you remind us, what you consider the advantages are of Annie's as a standalone company versus being part of a larger company?

John Foraker

Yes. It's a great question. And I've been involved with Annie's since 1998, when it was a $5 million or $6 million business with five or six people working there. And from the beginning, there has been a lot of strategic interest in the Annie's brand because of the strength and authentic equity -- the strength in the authentic equity and this emotional connection that we developed with a really important group of consumers that is growing rapidly. There has been interest in the Annie's brand over the years and I assume there continues to be. The way we think about it is we obviously as a public company have fiduciary responsibility to our shareholders to do the right thing, maximize shareholder value over time. So we'll certainly focus on that. I'd say, as I mentioned in my closing remarks, Annie's had a $200 million now with the opportunity to be multiples bigger than that.

We think we've done a very good job growing the top-line in this business. We obviously have done a much poor job growing the bottom-line with strong visibility. So we need to execute better. And we're going to continue to try to grow the company independently focused on our mission and values. But as I said, we also have to do the right thing for shareholders. So I really have no comment on any specific interest there. There's nothing to say there, but I think in general that's the way you should think about it.

I do think that obviously this brand is going to be a lot bigger in the future and I'm sure the interest in it will increase over time as it always has.

Operator

Thank you. Our next question is from the line of David Palmer with RBC Capital Markets. Please go ahead.

John Foraker

Hi, David. Hello?

Operator

Your line is now open, sir. You can take yourself off of mute. Thank you. We'll go ahead and move on to our next question from the line of Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow - Credit Suisse

Hey, John, I remember on the last call you'd said that organic wheat access was bad and it seemed to get worse again in the quarter. And then the other issue that seemed to pop up again was obsolescence. I brought that up last quarter too and I was concerned that that's going to continue to be a problem because the portfolio is getting more complex. So may be just take them one-by-one like what changed over the last three months in organic wheat? Is it because your competitor is soaking up a lot of it and the sales are may be good in your competitor there? And then on the obsolescence side, what should we expect for fiscal '15?

John Foraker

Sure. So on the organic wheat side, let me take that first. So I mentioned in my prepared remarks there was a big dislocation. Historically when conventional prices had declined there has been lagging in effect and organic generally follows. We had that expectation going into the back half of our year based on many years of purchasing organic wheat and in the third quarter as we talked in our last call we clearly saw that going the wrong way.

The way I think you should think about the organic wheat market in general is there's been growing demand. It's clearly not just one new competitor coming in; there's a lot of organic bread brands that are growing and expanding nationally. There's just generally been a significant increase in the demand for organic wheat. And in the very short-term the supply hasn't reacted as fast as it needs to.

We didn't leave ourselves in a good position as we called out on the last conference call and as prices accelerated through the quarter it had a bigger impact on us. And another factor that caught us a little by surprise is we saw higher organic wheat inflation coming to us through us through our quarterly cofactor reconciliations which is a process issue which we've really focused on fixing which will give us better visibility in the future.

So what we've done to prepare and position ourselves, I mentioned a few things but really focused on getting longer out ahead more volume locked up with defined price. We can talk about that later, but in our guidance for the year we've leaned into it and we have much, much better visibility to our cost in our forward year than we had at this time going into last year.

So that's it on the organic wheat side. Over time, we will see how those markets react. We need to be much more sophisticated and better about how we're handling it. We brought in a really strong wheat Director of Strategic Sourcing with a lot of experience in this marketplace at big companies and we're building some systems that we didn't have before. So that's how I see that.

On the obsolescence side, you're exactly right. This is an issue that had really nagged us this year. Back in the second, third quarter timeframe we had some issues related to some pizza and things like that that we identified we thought that was mostly behind us, and that's how we spent a lot of time on the backend processes around inventory that was becoming to an aging stage. So something that would be in your warehouse to getting to a place where it doesn’t really have enough age on it to get out into the channel with the appropriate amount of available age for the trade.

So we did improve that end pretty significantly and put ourselves in a position where we could get rid of the backend stuff and get much better price realization.

The area that's been much more difficult where we spent a ton of time especially over the last couple of months has been on the front end on improving our demand planning, putting better systems in place for forecasting so that we can really manage the front end of our business with the growing complexity that you're absolutely right, exist in our business.

And Zahir will take it now.

Zahir Ibrahim

Rob, let me just add to John's comment. So in the area of just planning and forecasting we've been focusing our intention on building a much more robust planning process and really taken into account some reflection for unforeseen items. And it all starts with just taking the learning’s from what we've seen coming through in fiscal '14. For example, in the area of inventory obsolescence even mix shifts in making sure that we build into our fiscal '15 planning far more reasonable assumptions. Going hand-in-hand with that is the need to make sure that we execute a lot better and to have a better line of sight in relation to our commodities. And we've done that in a number of areas.

Overall comment I will tell you just from a forecasting perspective is we recognize the need to refine our forecasting process and its going to be a journey that will take some time to do. And that's one of the reasons why we issued a somewhat wider guidance range than in the past.

Robert Moskow - Credit Suisse

Are you surprised at the difference between say the Nielson data and SPINS data? And then what you're actually seeing in terms of consumer demand may be like or is there -- or is the data consistent?

Ed Aaron

Hey, Rob, this is Ed. So, yes, we continue to see very consistent trends that we mentioned in our press release on a 52-week basis our consumption is running up 21% on all channel basis in the fourth quarter which has some negative impact of Easter. That number was about 20%. And we're continuing to see trends generally in that range into our current quarter. And we've also seen fairly consistent trends across categories as well.

Operator

Thank you. Our next question is from the line of David Palmer with RBC Capital Markets. Please go ahead.

David Palmer - RBC Capital Markets

If your guidance comes true, it looks like EPS growth would be sort of in that mid-to-high-single-digit EPS growth and not just for this year but will be in that zone for three years while your top-line growth will be averaging almost 20%, I think your EBITDA margin will be down in that 12% to 13% range for fiscal '15. I've been discussing your margins with industry people. I find them getting to this pretty surprising level even with the co-packing agreements which no doubt to have to pay to have people make your stuff. But given the fact that you're in the categories you're in with the pricing power that you have and the premiums that you charge, do you think that there is some potential step changes to your EBITDA margins over time as you perhaps find ways to value-engineer your business?

John Foraker

Well, I'll make the comment and then I'll pass it to Zahir. We clearly, if you step back and kind of look at our business this year and the impact of what happened, we were relatively modest in the pricing we took going into this year because we had a much more benign view on forward inflation, our core commodity. We obviously had the opposite of that happen. And we were in a position right now and through the first part next year where pricing has been a lag or inflation pretty significantly.

In our -- baked into our guidance and just our expectations for next year, there is a couple of really important things. First, we've taken a strong pricing action, very consistent with what we've done prior to the last year that will kick in the second half. Additionally, we have very strong productivity pipeline this year, really our strongest productivity pipeline ever. And one specific project in there that we have actually been working on for two years is the manufacturing related project that we'll be rolling into the middle of the year, which has pretty significant margin implications. So the second half margin structure on our business, we expect to be markedly higher than it has been recently. And that is our expectation for this business that we can run it with a higher margin structure, and continue to really generate a lot of cash in the business.

David Palmer - RBC Capital Markets

As a follow-up to Ken’s question I think you mentioned the strategic option question. Unless the goal would be to have -- would be acquire a swirling, you would seem like your asset light business and low need for cash, I mean you got a great balance sheet and obviously that’s there because of the asset light model. Why not take this business for a spin and buyback a lot of stock now, if you really believe that the turn is about to happen and that the stock market perhaps has it wrong about where your business is going?

John Foraker

Well, buying back stock is clearly one of the strategic alternatives you have in your overall capital allocation strategy. It's one that we'll consider in and addition to others. We don't have any plans to announce with respect to that today. But you can imagine that we're going to continue to be focused on figuring out ways and driving our business to maximize shareholder value over time and that is a strategy to do that.

Operator

Thank you. Our next question comes from the line of Bill Chappell with SunTrust. Please go ahead.

Bill Chappell - SunTrust

Good afternoon. Thank you. Yes. Just kind of following up on David's question. I mean as we look at the SG&A kind of ramp this year, I know some of it you said is marketing, but it's also most people. And so I’m just trying to understand is that just -- these are planned hires and that's indicative of just a lower sales dips of the inventory destock or is it -- are we still in bill mode in terms of infrastructure where we don't see operating leverage really until kind of 2016 or even later?

Zahir Ibrahim

Bill, this is Zahir. So you've called out some key points. Obviously, the customer the inventory impact, impacts our operating leverage and the operating margin line. If you focus specifically on SG&A perspective fiscal '15, we have got a couple of compensation based items which if you actually move them to one side for a moment our SG&A growth next year is similar to what it was. SG&A as a percentage of sales is similar to this year.

In relation to those compensation I think the stock-based compensation is a reflection of the fact that we're a fairly new IPO company. Each year we have an additional years of stock compensation costs coming up and so we have hit a total run rate. So our restricted stock is expensed over three years, our option to our expense over five so that will give you an idea of that.

And then in addition, we'll have a step-up in our incentive compensation cost from hitting target to fiscal '15, compared to where we land in fiscal '14. So if you move those to one side for a moment and you look at the investments we are making in fiscal '15, a lot of them are focused around people who are customer facing people either in sales, people in marketing and innovation that are going to help to drive our innovation agenda. In addition, yes we are making investments in the back office and that's across finance, IT supply chain, as well as in systems investment. But that's fairly normal for a business of our size and where we are in our lifecycle. As we start thinking about further out, yes we do expect to see SG&A leverage going into the future.

Bill Chappell - SunTrust

Okay. And then mainly switching to the UNFI issue, can you just really help us understand how this is different from last year when running UNFI was doing something similar? And make sure I understand like have they just decided they want to lower the total number of days on-hand and your categories are hitting more than others? Or what give you confidence that a year from now we're not looking at round three or round four of this happening?

Zahir Ibrahim

Yes. That is a very fair question. And I would say historically, we had relatively limited visibility into the inventory levels in that customer. We mentioned that last year when were going through this. I would say what we are hearing from the customer is that there is a significantly renewed intensity of focus on reducing inventory levels throughout their system. We don't believe that it is just us. I think they should speak for themselves on that, I’m sure they will ultimately.

But we think we have a good handle on what the ramp down looks like. And they've given us very specific targets which we have modeled into our forward guidance so we think we have correctly called the forward number hopefully conservatively and we believe conservatively. And we just have to keep a very close eye on it and that's what we're doing and let have Ed add to that.

Ed Aaron

Yes, I just want to add on just in terms of where we are modeling kind of inventory is going and our levels where we have been before with that customer and in terms of the possibility of further destocking in the future will be very hard to see how they could come down from there.

Bill Chappell - SunTrust

Okay great. Then one last one just on the Easter shift on meals. I assume that you would assume -- I assumed that you would get in Easter benefit in this first quarter. And so any of your guidance in relation to that?

John Foraker

No, no, that's true. I mean, syndicated data fell probably about there. You can see that our sales did bounce back after that Easter period, but we've reflected our view in this quarter forward and I think we've actually kind of called to try to give you a view of what the first quarter looks like. Meals was impacted a little bit more. It tends to be -- it’s our biggest business and we also have a lot of display around that holiday and so it just impacted us a little bit more in that business.

Operator

Thank you. Your next question comes from the line of Chris Growe with Stifel Nicolas. Please go ahead.

Chris Growe - Stifel Nicolas

Just a couple of questions if I could and sort of both of them are follow-up. So in relation to the increase in input cost inflation which is seemingly continued here and into the fourth quarter. The -- you're taking pricing at retail. I know that in fiscal ’14 you were a little more cautious in how much you price? Is it your expectation then you're going to see pricing amongst competitive products or does that put you to further disadvantage to competitors to your cost inflation in your business?

John Foraker

I would make a general statement. I mean, each competitor is different, they have their own issues. I would make a general statement that we see a lot more inflation out there and there is a lot more pricing is being taken this year than there was a while back. We think the pricing that we're taking is relatively modest. We see no issues in getting the price realization and we feel we’re very competitively positioned in our category. We think particularly in the Mac & Cheese category we see very strong performance there. There has been a new competitive entrant that has come into that category that people have a lot of questions about.

What I can say about that is that we have a very solid understanding of how that brand is doing. And from our perspective, I won't comment about their business but I will comment about ours. Over the quarter, for example the fourth quarter, our share in U.S. grocery increased by 4 percentage point during that timeframe, which is really the heart of their launch into some major, grocery retailers. And we are seeing strong share gains in a lot of places. So we feel like we got a very strong brand. We feel like we've got the ability and capacity to price and we think there’s going to be pricing out there in a number of different places, particularly in the national organic arena. And so we think it's the right thing for our business and we think it will have a good impact on our full year, next year.

Chris Growe - Stifel Nicolas

Thanks. To follow-on to that. Would you be most interested in your -- the price gap for your product versus the conventional product in whatever category that may be or another organic or natural competitor?

John Foraker

Well, we focus obviously on both. And we want to make sure that we understand our price gap between both of them. We think our GAAP is in a good spot right now. I think our underline consumption over the last year support that thesis and we stay very focused on that. So I think we're going to be well positioned to continue to grow.

Chris Growe - Stifel Nicolas

Okay. And a question for you, then on the SG&A portion. I want to ask first, if there is a way -- can you or have you quantified the incentive comp increase like, roughly what magnitude that has year-over-year? And then just related to that, is a larger point? We were talking SG&A leverage up until early last quarter until we saw this quarter as well for other reasons. Why is it all of sudden gotten away from us and so we got an increase in SG&A, what happened so quickly? It sounds like we are going to have an increase in people cost at least for next year.

Zahir Ibrahim

Yes, sure. So, good afternoon, Chris. Specifically on the compensation cost, as I was just saying on the previous question to Bill. The impact from the stock-based compensation to our numbers is going to be $0.05 on EPS in fiscal '15 and from an incentive compensation perspective it is $0.03. And that gives you an idea of those two particular drivers. And that's not accounting for more headcount growth, that's not on a like-to-like basis and just for the reason that I told about. And the $0.05 is year-over-year just and also the $0.03.

And then specifically, on SG&A, when you strip out the impact of this compensation on our SG&A percentage, we're broadly flat. And I appreciate that we're not seeing operating or SG&A leverage. So as I was saying previously, we're in a period where we're making us a broad-based assumptions -- broad-based investments in the business just to pull our top-line growth both in the area of sales, marketing, and innovation. And that is what you would expect for a business that has grown it’s top-line 20% per year consistently.

Operator

Thank you. Our next question comes from the line of Jon Andersen with William Blair. Please go ahead.

Jon Andersen - William Blair

I wanted to shift gears. I wanted to ask about the frozen business, may be how we should be thinking about that business over the next 12 months to 24 months? What we should be expecting there? Our check seemed to indicate there is quite a bit of change happening right now at the shelf. And so I guess our concern would be is there kind of a window of opportunity here we're seeing a lot of new brands, established space in the frozen cabinet. And where are you in terms of your ability to kind to go after that and capitalize on that opportunity?

John Foraker

Well, we are capitalizing. I'll give you an example. In our frozen meals business, family size meals which we introduced last year, we introduced those initially with one retailer. They have been reforming well, particularly our Lasagna item which has been doing exceptionally well. We're just now this -- in this quarter expanding into two significant other grocery chains. This is our first big step into grocery with some items in pretty deep distribution. And we have some additional innovation coming in that category later this year.

Obviously, on the call, we -- on the prepared remarks we mentioned that we're entering the frozen snack category relatively soon actually in just a few months. Those products look fantastic. They're positioned well in a category. There is a general interest by retailers all over the country now to try to figure out how to address a consumer that the existing brands are kind of missing and creating kind of negative overall growth environment in the total frozen space. And so brands like Annie's do have a significant window of opportunity now. And we're going pretty aggressively at that.

The other point I'll make is that, we don't have the specific plan that we're ready to announce now but we have said and we are working on our answer in the pizza area and we will have some news on that in the not too distant future. So we do think it's a great opportunity. And we think we're moving at good pace with really good products and we just need to stay at it. And I think the brand will be positioned to do well in that environment.

Jon Andersen - William Blair

Okay. One follow-up on gross margin. There were couple of items that you identify and talked about but within that much color to, one is the reference to mix changes. Could you talk a little bit about are we -- that I mean, are we talking about product mix, channel mix? And then secondly, increased trade spending related to a more competitive retail environment. Where are we in the cycle of competition here, you alluded to more competition in Mac & Cheese. I think there may be more competition coming in snacks. But if you can give us some context on where we are in the level of trade setting intensity, are we at a max point right now, or do we think it continues for the time being?

Zahir Ibrahim

Jon, let me start off on the mix space and then John will take the second part of that. So from a mix perspective obviously, during the course of 2014, we've seen some impact on our margins. And the way we planned fiscal '15 and then reflected in our guidance is to take account of a mix dynamic running through our margins. There is a number of factors there it can be driven by channel shifts. But one of the key ones that impacts our business is our aggressive innovation and investments that go hand-in-hand with you as you'll try to drive that at pace.

John Foraker

Yes. And on the competitive environment the point we want to call out, we obviously recognized these two competitors coming into our space, it's been well known for a while. I mentioned earlier, how we think we're doing there. We are very necessary being slightly more aggressive to make sure that we defend our turf and that we maintain the merchandizing that we want to maintain to drive our business. We're being very disciplined about it. But we have the ability across our total business to be aggressive at points where we want to be. And so that's our strategy. And we want to make sure that that was embedded in our forward guidance so that we have the ability to compete and to continue to grow sharing in our categories even with other players coming in.

Operator

Thank you. Our next question comes from the line of Mitch Pinheiro with Imperial Capital. Please go ahead.

Mitch Pinheiro - Imperial Capital

Yes. Most of my questions have been asked, but just a couple odd things here. So when you refer to the competitive retail environment, you're strictly referring to competition coming in on your key items, is that what I understand?

John Foraker

Yes, generally. I mean, I'd say there’s obviously some very specific competitive issues between retailers on the retail side. I won't comment on that. But clearly, there is a lot of consumer interest in national organic and many different forms of retail. Annie's sells its products into all those different classes of trade or they are most significant ones. So it's a great growth environment for us, we just wanted to signal that. We do think there will be a little more competition in on the branded side is some of our categories, we should anticipate that, even the entries that are coming. And we're going to be very smart, very disciplined but we're also very focused on winning. And we want to make sure that is embedded in our forward view of our business.

Mitch Pinheiro - Imperial Capital

Okay. And then when I look at the first quarter I'm just having trouble on the revenue side. So you have the Easter mix helping, you have the inventory issue hurting and then at the same time, in the fourth quarter, your consumption was a lot stronger than looks like your shipments. So I wasn’t quite sure how this all nets out. Is it a -- you're still expecting revenue growth in the quarter, is that correct?

John Foraker

Mitch, that's correct. And one thing just to point out is that the destocking impact that we talked about is pretty -- its not the only thing in the first quarter but the first quarter is going to feel a fairly big brunt of it. And the smallest selling volume quarter of the year it had this pretty big impact on our growth rate but we certainly do still expect to show positive revenue growth in the quarter.

Mitch Pinheiro - Imperial Capital

And given your model, I mean there is no -- or let me ask it this way. Is there any negative operating leverage due to lower volumes?

John Foraker

I mean, it gets --

Zahir Ibrahim

Hi Mitch, this is Zahir. Go on. You were going to elaborate.

Mitch Pinheiro - Imperial Capital

Yes, just I mean obviously in fixed costs but you have a largely a variable cost model on the gross margin on the cost of goods side. So I was wondering whether there was an impact at all or something I'm missing on the gross margin that would further affect your first quarter due to lower volume.

Zahir Ibrahim

Yes, absolutely. So you called out right in terms of the de-inventorying will have an effect in Q1 because about half of the full year impact is going to go through in that quarter. On some of the other factors, and we've talked about them from a full fiscal '15 year perspective, but will have a bigger impact in Q1 include the timing of our trade depending on investments in the year that concentrated in Q1 more so than this time than last year. And that's about really is a function of timing to support base business growth but also the timing of our innovation launches. And we'll see some tailwinds on that in the second half.

Given the level of commodity and pricing impact we saw in the second half of 2014 and coming into first half of 2015 it will be at a higher level than the comparative numbers for the first half of fiscal '14 as well. So that's probably the biggest chances on margin.

Mitch Pinheiro - Imperial Capital

Okay. And then last just to follow-up on the frozen side, when do the new frozen products hit, when is the shelf set? Would that be in August?

Zahir Ibrahim

Yes, yes, we will begin shipping in August.

Operator

Thank you. Our next question is from the line of Scott Van Winkle with Canaccord Genuity. Please go ahead.

Mark Segal - Canaccord Genuity

Yes, hi, guys. It's Mark Segal for Scott. On the last call I think you drew out a stack that growth in box Mac & Cheese was up more than 30% in conventional retail where you'd introduced the microwavable cups. Given I think the press release called out inventory obsolescence partly attributable to new products and that you've got entrées and pouches coming, can you talk about the incrementality that innovation is bringing?

John Foraker

Yes, we commented last quarter I believe that retailers where we had a strong presence of our box items plus cups we were seeing stronger growth rates across our business and that's definitely the case. The cups are highly incremental. They're a little less incremental in some retailers that heavy in cups; they're the categories that are focused on convenience. So they're definitely incremental usage stage and with lots of consumers.

And just across our business if you look at our bagged snacks introduction which we launched a while ago but recently we see very strong demand from consumers for that offering. Little lower price point, a more convenient resealable, more consumer friendly package. And so we think that's a great growth platform for us to drive in the future.

And on bagged snacks we mentioned in our prepared remarks that we're going to really drive that business this year. We were a little capacity constrained in the May timeframe and in early June. That's really loosening up. We're going to really start driving that business. There's been a lot of retailer interest in those products and the vast majority of those retailers are looking at bringing them in incrementally and leaving the boxes where they are.

And recall or you may not be aware but much of our grocery distribution in snacks are in boxes and traditional macho food section. And the bags give us the opportunity to play a much more mainstream game in terms of distribution points, growth and breadth of SKUs. So that's the strategy there and you'll continue to see grow pretty aggressively over the next year.

Mark Segal - Canaccord Genuity

Okay, that's helpful. And then last quarter I think you spoke about visibility on wheat through the first half of next year realizing the dynamics at play in the market and the capacity constraints. Can you update us on where that stands now and what type of swing factor the back half of the year might play in terms of where current guidance stands?

Ed Aaron

Sure. This is Ed. So we have made further progress in enhancing our forward coverage. Right now we've got about three quarters of our wheat requirements met through contracts with specific prices attached to them. Now keep in mind, wheat is an agricultural commodity. So there is some sensitivity to I guess that come off of those crops that we contracted for but we have further increased our coverage. We do expect to have another fairly significant inflation year in organic wheat but at the same time in terms of where we have been able to lock in our exposures they are generally favorable to weather current spot conditions are.

Operator

I'm showing no further questions at this time. Ladies and gentlemen, that does conclude the Annie's, fourth quarter fiscal 2014 earnings call. If you would like to listen to a replay of today's conference call, please dial 1-800-406-7325 or 303-590-3030 using the access code 4685399 followed by the pound key.

Thank you for your participation. You may now disconnect.

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