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Annie’s, Inc. (NYSE:BNNY)

F1Q13 Earnings Call

July 24, 2012 5:00 pm ET

Executives

Erica Abrams – Investor Relations

John M. Foraker – Chief Executive Officer

Kelly J. Kennedy – Chief Financial Officer and Treasurer

Analysts

Marcela Giraldo – Credit Suisse

Edward Aaron – RBC Capital Markets

Ryan Sundby – William Blair & Co.

Operator

Ladies and gentlemen, welcome to the Annie’s, Incorporated, First Quarter Fiscal 2013 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. (Operator Instructions) This conference is being recorded today Tuesday, July 24, 2012.

And I’d now like to turn the conference over to Erica Abrams of the Blueshirt Group. Please go ahead.

Erica Abrams

Hello, and thanks for joining us today, as we report financial results for the first quarter of fiscal 2013. Joining me on the call today, are John Foraker, CEO; and Kelly Kennedy, CFO of Annie’s.

I will now present our comments on forward-looking statements. Some of the statements we make during this conference call are forward-looking, including statements concerning our positioning for future growth, investments in areas of strategic focus including continued innovation, increasing demand for natural and organic food products and our expectations concerning market position and operating information.

The forward-looking statements made on this conference call are based on management’s current expectations and are subject to uncertainty and changes in circumstances and are therefore subject to significant risks. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from those expectations. Our reported results should not be considered an indication of future performance. There are many potential risks and uncertainties that could cause actual results to differ from our current expectations, as well as those risks and uncertainties included in our risk factors section of our filings with the SEC, which were available on our Investor Relations portion of our website at Annies.com, and on the SEC website at sec.gov.

Additional information is also available in our Annual Report filed on Form 10-K for the fiscal year ended March 31, 2012. All information provided in our release and in the enticement today is as of July 24, 2012 and we undertake no duty to update this information for any reason, unless required by law.

Certain financial measures that we use on this conference call such as adjusted net income are not prepared in accordance with GAAP, and have been adjusted to eliminate the impact of certain non-recurring, expired or non-cash expenses or charges, as the case maybe. Our GAAP results and reconciliation of GAAP to non-GAAP financial measures can be found in our earnings press release.

This conference call is being webcast, and an archive of the webcast will be available on the investor relations section of our website at Annies.com, it’s also available live at this time.

In addition, on July 17, 2012 we filed a registration statement for a follow-on offering by certain of our existing stockholders of up to 3.65 million shares of our common stock, which includes an over allotment option granted to the underwriters. In the secondary offering, no shares will be sold by the company, and therefore the company will not receive any proceeds from the offering.

The company will assume certain expenses of the offering as set forth in the registration statement. This offering is tending and there can be no assurances as to when it maybe completed if it all. We will not comment further regarding the follow-on offering on this call, either in our prepared remarks or in the Q&A session that follows.

Now, I will turn the call over to John. Please go ahead.

John M. Foraker

Thank you. And thank you everyone for joining us today as we report Annie’s first quarter of fiscal 2013, and our second quarter as a public company. Today, I’ll provide a brief overview of our business results in the quarter, and we’ll then turn the call over to Kelly Kennedy, our CFO to review our financials. For the first quarter, we’re reporting solid financial results driven by robust consumer trends and good execution across the business.

We achieved 20% top line growth to $34.3 million in net sales, and net income of $2.1 million or adjusted EPS of $0.12. Shipment growth was led by particularly strong performance in both the natural and grocery channel. Consumption growth remained very strong in all three of our key channels natural, grocery and mass this quarter following in aggregate range of approximately 16% to 18%. The acceleration of consumption trends that we saw in our Q3 and Q4 timeframe last fiscal year continued unabated in Q1.

Our meals category was the real star in Q1 showing 40% growth driven by macaroni and cheese, which is benefiting from execution of our mainline distribution initiative. While Mac & Cheese was the predominant driver of meal growth in Q1, sales also benefited from our initial Organic Rising Crust Pizza launch.

Our four strategic growth drivers are: number one expanding mainstream distribution. Number two, improving placement locations in stores. Three, increasing our brand awareness and household penetration, and four, continuing to deliver exciting innovation that our consumers love.

In the first quarter, we saw continued progress in both building deeper distribution and in our efforts to move our best selling items out of standalone natural section, and into mainline grocery aisles. When we are located in the main aisle, we know we have a much better growth and share opportunities in our category. Retailers continue to embrace the initiative understanding that it results in greater customer satisfaction, store loyalty and profit potential.

The Annie’s brand appeals to attractive consumers that tend to have higher incomes and education, and they buy bigger and more profitable shopping baskets in average. Our brand also connects very powerfully with millennial age 17 to 32 years old, an important and emerging group that will drive household formation and CPG industry growth over the next decade. For these reasons, momentum in our mainline initiative is accelerating. We’ve had a number of key wins this quarter with important national and regional grocery chains.

We’ve been executing the strategy against Mac & Cheese for about a year, and it’s contributing to strong growth in meals. Since May, we’ve been presenting the same business space to retailers and our other important categories with good results as well.

Another of our key growth strategies is, innovation; and we have two updates here. First, we made the decision to accelerate some incremental R&D investment into Q1 to the tune of approximately 200,000 relative to our original plan. These investments will allow us to accelerate the timing of some incremental snack line expansions into this fiscal year; we will begin selling these items to retailers in January 2013. We expect Annie’s consumers to be delighted by these products, they taste great.

Second, I’d like to update you on the progress we made this quarter with Frannie, our frozen category initiative. The original certified organic items we launched in January continue to perform well. Velocities and our share of the category continues to increase. We’ve developed a solid following for these items and direct consumer feedback continues to be very positive.

The launch of our made-with-organic Rising Crust Pizza items is progressing nicely as well. Since April, we’ve been presenting these items to focused list of about 25 mainstream grocery and mass accounts, as well as broadly to the natural channel. We’re receiving a very positive response.

During Q2, we will begin shipping to first big retailers who have already accepted the items. They are combination of both large and national retailers, and some important regional chains. As a result, we will roll into more than 2,500 highly targeted points of distribution in mainstream grocery and mass over the remainder of Q2.

Retailers moved more quickly than we had earlier anticipated to bring the items into their assortment. As a result, we are about a quarter ahead of where we thought we would be just a short while ago. Our goal for this year is to establish a strong and sustainable be ahead of success with both retailers and Annie’s consumers. We’re off to a very good start, and we expect momentum to continue to build in the second half of the year.

In summary, we performed very well in the first quarter, and we continue to execute at a higher level. Due to our robust consumer trend and a good execution against our growth strategies, we remain confident in our ability to deliver strong result this fiscal year.

I want to take this opportunity to thank our loyal consumers, our customers and all of our investors for their role in Annie’s success to-date. I also want to personally thank every employee for both your continued commitment to the Annie’s mission, and for your strong execution against our important initiative.

Now, I’ll turn the call over to Kelly for her financial review.

Kelly J. Kennedy

Thanks John, and thanks for joining us today as we report our first quarter financial results. As John highlighted, net sales for the quarter were $34.3 million, up 20% over the first quarter of fiscal 2012. This was a strong result for our first fiscal quarter, which is typically our smallest sales quarter.

Volume was the largest driver of the year-over-year growth driving approximately 17% of our growth with the balance coming from higher average selling prices. Net income for the first quarter was $2.1 million, which compared to net income of $1.8 million prior year.

Net income in Q1 of fiscal 2012 includes approximately $0.5 million in expense related to non-cash, non-recurring warrant liability charges. On an adjusted basis, net income for the first quarter was $2.1 million or $0.12 per adjusted diluted share. This compares to $2 million or $0.12 per adjusted diluted share in the same period a year-ago.

As we expected, our year-over-year EPS comp was impacted by higher SG&A spending as we’ve made significant investments in people and infrastructure. As a result of these investments, we have a strong foundation on which we can scale the business quickly. We expect to see stronger operating leverage over the course of the year as we move into our larger sales quarter.

Adjusted EPS this quarter was based on our diluted share count of 17.6 million for the first quarter as compared to an adjusted share count of 16.5 million in the same period a year ago. The share count increase was primarily due to the 950,000 shares issued in the IPO on April 2, which were not included in the same period of the prior year. Our effective tax rate in Q1 was 40.9%. We expect our full fiscal year 2013 tax rate to be slightly higher than previously forecast due to higher expected federal and state tax rates.

Turning to more details about our financial performance in the first quarter; as a reminder, we report our net sales at the product category level, which includes meal, snacks, and dressings, condiments and other. In the first quarter, 43% of net sales were from meals, up 40% over the prior year’s first quarter. Meal growth was predominantly driven by strong growth across all of our Mac & Cheese line, with some small benefit from pizza.

39% of sales were from snacks, up 13% over the prior year’s quarter. The snack growth rate for the quarter was impacted by the timing of shipments to customers. We saw strong consumption trends in our snack lines for the quarter in line with consumption trends from meal.

18% of sales were from dressings, condiments and other. This category was impacted by the discontinuation of cereal. Excluding cereal, dressing, condiments and other products grew by 8%.

To make it easier for investors to track trends by product categories, we include supplemental information on our investor relations section of our website that outlines our quarterly net sales by product category. We only provide our channel mix details on an annual basis as we typically experience quarter fluctuations that are not representative of longer-term trends.

Gross margin for the first quarter was 40.3%, down slightly over the prior year’s first quarter of 40.5%. As we highlighted in our last call, our commodity costs are higher in fiscal 2013. Typical of our sourcing practice, we’ve entered into pricing contracts under most all of our key commodities through the end of the fiscal year. And as such, we do not expect to be significantly impacted in fiscal 2013, due to commodity cost inflation resulting from recent drought conditions.

Despite higher overall ingredient cost this quarter, we were able to offset the impact, thanks to the price increases taken in fiscal 2012, combined with a cumulative benefit of our fat rabbit cost savings project. At the end of the first quarter of fiscal 2013, we announced a planned price increase in the range of 2% to 3% across many of our products that will be effective on October 1.

Turning to selling, general and administrative expenses. In the first quarter, SG&A increased to $10.2 million from $8.3 million in the year ago period. The largest drivers of year-over-year dollar increase were the addition of headcount to support our growth and operating as a public company, the impact of higher volume and freight and warehousing commission, higher expenses related to public company costs, higher R&D spending and higher stock compensation expenses.

Our SG&A expenses for the quarter were slightly higher than we had originally planned. As John mentioned, we shifted $200,000 of R&D spending into Q1 and the balance is related to volume and mix, which will wash itself out in future quarters.

Based on our net sales and SG&A results, operating income for the first quarter was $3.6 million, up 10% over prior year. Turning to our cash flow and balance sheet, as we mentioned in our last call, we paid off $12.8 million of debt during the quarter with net proceeds of our IPO combined with proceeds from stock option exercises.

Free cash flow from operations was strong at $4.4 million. We closed the first quarter with just over $5 million in cash and no debt on our balance sheet. During the quarter, we successfully transitioned to a new larger warehouse facility and effective July 1 we are operating on a new Tier 1 ERP system that will support our growth well into the future.

Capital spending in the first quarter was approximately $700,000 most of which was for system enhancements related to our new ERP. In closing, we are pleased with our financial performance in the first quarter and are optimistic about our business for 2013. Strong consumer trends combined with solid execution of our core strategies around distribution, placement awareness and innovation continues to overdrive our top line results. We continue to make investments to support our growth and are confident in our ability to build a sustainable business for the long-term.

Now, I’d like to turn the call back over to John for closing remarks.

John M. Foraker

Thanks, Kelly. We’re pleased with our performance in the quarter and we’re excited about the future. As consumers continue to move toward healthier food options, the natural and organic food movement continues to move into the mainstream and Annie’s is playing an important role in the growth of the category.

Over the coming year, our team will continue to focus on the four important growth strategies while remaining true to our mission and our very important core values that got us here. We look forward to keeping you posted on our progress.

Okay, operator you can now open up the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question comes from the line of Rob Moskow with Credit Suisse. Please go ahead.

Marcela Giraldo – Credit Suisse

Hi, this is Marcela for Rob.

John M. Foraker

Hello Marcela.

Marcela Giraldo – Credit Suisse

So, I wanted to ask you about the [newsprint] tracking data. It was a little softer than what you actually reported and we wanted to know the difference between these and the shipments is mainly related to the channel or maybe some very important channels that the newsprint data is not considering or maybe a difference between shipments and consumption.

John M. Foraker

Sure. So, you’re probably looking at Neilson all other channel data which is conventional grocery drug mass target and Wal-Mart Iceland.

Marcela Giraldo – Credit Suisse

All right.

John M. Foraker

We look at a number of different data sources, we pull Neilson, but for all of our channels and we also have direct insight into what’s going through the register of a number of our retailers on a weekly basis.

And so, what I can tell you is what you may see in some of the grocery data or in aggregate data looking at like this in a four week period. You might see some softness because of timing of promotions in the like, but I can tell you, we look at 12-week data and across our business, and in some channels that you can’t see, we see very strong trends, and overall in the range of 16% to 18% as I mentioned. There’s really no change in our outlook on where the consumer is at and where our velocities and consumption are from the last call we had.

Marcela Giraldo – Credit Suisse

Thank you.

Operator

Thank you. (Operator Instructions) And our next question is from the line of Ed Aaron with RBC Capital Markets. Please go ahead.

Edward Aaron – RBC Capital Markets

Hi, thanks. Good afternoon, everybody.

John M. Foraker

Hi, Ed.

Kelly J. Kennedy

Hi, Ed.

Edward Aaron – RBC Capital Markets

Hi, just to follow-up and close the loop on the kind of the shipments versus consumption question. I think you said in your prepared remarks that you want to shift a little bit in the snacks, so does that mean that your reported growth actually lagged your consumption growth in the quarter and if so, could you elaborate on what the consumption growth actually was?

John M. Foraker

Yeah, so the consumption growth through measured channels as I mentioned before was up in the 16% to 18% range, on across aggregate channels. While we were referring to in the channels its snacks growth rate on snacks is a little bit lower in shipments for the quarter. The consumption through those retailers and all those items was up very consistent with where macaroni and cheese was. You recall, we ran a little bit earlier Easter promotion this last year because of the timing of that and Earth day promotions were a little bit earlier. And so that impacted the snack business a little bit, but there is no change in our outlook for snacks, the growth rates for that business where it’s been historically and where it will be in terms of our business this year. it's very healthy.

Edward Aaron – RBC Capital Markets

Okay. And then just maybe a quick follow-up on the new Pizza business, I apologize if I missed it, but I think you gave a number of points of distribution of 2,500. Did you specify or can you specify roughly how many retailers that equates to?

John M. Foraker

Yeah. So there’s about 25 that I mentioned that we were targeting that's about six to seven retailers in total. So it’s a small percentage of the ones that we’re going after and we expect more success going forward as well as we continue to sell those in.

Edward Aaron – RBC Capital Markets

Okay. Thanks a lot.

John M. Foraker

You bet.

Operator

Thank you. And our next question is from the line of John Anderson with William Blair & Company. Please go ahead.

Ryan Sundby – William Blair & Co.

Hi, it’s actually Ryan Sundby in for John. Good afternoon everyone.

John M. Foraker

Hi, Ryan.

Kelly J. Kennedy

Hi, Ryan.

Ryan Sundby – William Blair & Co.

Hi. Can you guys maybe talk a little bit about the rationale on the pricing actions? Is this to maintain price gaps or maybe just a little more color on what the pricing actions are four, and then how was retailer appetite went for that, and what do you kind of think the consumers going to think about that?

Kelly J. Kennedy

Yeah. We typically take pricing at least once a year, and it was a planned price increase we announced usually 90 days in advance. So we were – we had just announced in July, it is across many of our products, but it’s typical that we would take a pricing action on an annual basis and so…

John M. Foraker

Yeah. And we look at the price gaps between competitive products. we look at how our businesses are performing. we look at where we think consumer elasticities are, and we're very careful on target about how we do it and we don’t see any significant issues putting this through. We have a very strong performing premium brand that’s driving profitability and success for the retailers that we do business with and this is all due course for us.

Ryan Sundby – William Blair & Co.

Okay, got it. And then could you maybe talk a little bit about maybe the margin implications as you continue to migrate more volume towards conventional grocery, is there any kind of impact that would have to your financials?

Kelly J. Kennedy

Yeah. I mean to clean our different product categories in our different standards, there’s not materially different overall kind of contributions between those channels. and so we don’t expect to have any material shift as a result of that. As you recall we do from quarter-to-quarter how margin shipped a little bit just based on specific kind of performance of trade events versus for each quarter. but in general, we tend to ground around the same range.

Ryan Sundby – William Blair & Co.

Great, thanks guys.

John M. Foraker

You bet.

Operator

Thank you. And at this time, I am showing no further questions in the queue. So ladies and gentlemen, thank you for joining on the conference today. If you would like to listen to a replay of today’s conference, you may do so by dialing 303-590-3030 or 1800-406-7325 and entering the access code of 455-2872#. we thank you for your participation. and at this time, you may now disconnect.

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