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Executives

John Foraker – CEO

Kelly Kennedy – CFO

Annie’s Inc. (BNNY) Barclays Capital Back-to-School Consumer Conference September 6, 2012 3:00 PM ET

Unidentified Analyst

Thank you. Our next presenter will be Annie’s which is presenting at the Back-to-School Conference for the first time. Following the company’s IPO earlier this year, Annie’s has established itself as one of the few pure play in natural and organic food company which has enabled to articulate a growth strategy that differentiates it from most food peers. We are pleased to have CEO John Foraker and CFO Kelly Kennedy with us here to discuss the company’s forward plans. Note the company will be able to take some questions here in the big room but we will be able to do a breakout if they got to get out to a meeting right after this. And we’ll go from there. Over to you John.

John Foraker

Thank you very much everybody. It’s great to be here. I am joined by Kelly Kennedy and we are excited to present the business to you today. Hopefully, in this short presentation, we will be able to give you a good idea of the business, our brand and update you on our key growth initiatives in the business.

These pictures here on – actually I should say, or we might be able to say Safe Harbor, see my attorney is happy. But these pictures here on this page reflect the approachable personal way that we built the Annie’s brand for over 20 years. And building the brand in this authentic passion and being approachable and connected to our core consumers is one of the key to our success. And as a result, you can see we manifest that in everything that we do.

One of the most important things you to understand about Annie’s is that we are a mission driven company. We operate by important core values around quality, integrity, social responsibility, and environmental sustainability. Understanding that is key to understanding our brand, our business opportunity and most importantly our unique company culture.

The values you see here on this page and that I just mentioned are internally woven into the brand and the value proposition that consumers vote with at shelf when they connect with our brand. And we think that’s very important to current as well as next generation consumers as they relate to us and support where we headed. Mission and culture had been a very important competitive advantage for Annie’s in the past and we expect they will be the future as well.

On the strength of strong great products and strong execution and our mission, we’ve been able to develop into one of the leading natural organic brands in the United States. We’ve grown from natural channel roots into over 25,000 points of distribution. As you can see on the left hand side of the page, we’ve approximately double sales 17% CAGR over the last five years or so. And we’ve significantly increased our operating income which was $20 million on an LTM basis and importantly over $10 million in free cash flow during that time frame due to our efficient business model that you will hear about in a moment.

We are well positioned for future continued growth and strong cash flow generation in the core business. Our recipe for success with the brand is really simple. We identify big conventional food categories that are important and highly relevant to mom, kids, and family. And then we develop a simple delicious natural organic alternative to appeal to that consumer and make it widely available where consumers want to shop.

This formula works. Right now, we have the number one share across all channels for natural and organic products in macaroni and cheese, snack crackers, graham crackers, and fruit snacks. And we started as Mac and cheese company as many people know but have build a strong position in snacks which is about the same size and Mac and cheese and both continues to do really well. And we expect to add other categories to this number one list as we grow in the future.

Quickly, there are four compelling reasons to invest in Annie’s. First, the industry, this is an attractive industry with long standing consumer trends towards health that winded our back. Second, we are an authentic brand; we are proven and well positioned where consumers are going. Third, we delivered strong financial performance in an efficient business model that generates a lot of cash. And fourth, we are promising growth for the future. We understand the growth levels in this business and we are going to continue to hold them.

A moment on the brand. Annie’s is an authentic trusted brand and there were four threads to the Annie’s brand fabric. The first is Real and Authentic Roots. There is really Annie Withey, the sister on her farm in Connecticut. She has been involved with the business since the beginning. She still plays an important role in the business, writing a lot of consumer communication on our products. Bernie is our Rabbit of Approval rather than our seal of approval. He was a natural rabbit that was Bernie’s when the company started. I mean, he is the common iconic vision for the brand and connects with consumers in a very important way.

We made premium great tasting products. We are among the first natural organic products to recognize that taste is the one of the most important things. So we formally to taste great. We simple natural and organic ingredient from people and places we trust and from companies and supply partners that share our values around social responsibility and environmental sustainability.

And fourth, we have built the brand with socially responsible DNA. We are really a leader in this area and it’s a very important part of our culture, the way we do business, the way we source. And it’s increasingly relevant to groups of consumers like Millennials who are going to drive. That’s big changes in the way CPG products and retail looks like over the next 10 years and we connect very closely with them.

So as a result, we have a very trusted powerful brand. It’s premium but it’s affordable. The average these items retails in out there in the world at $2.50. It’s a premium to the competition but it’s a small premium that mom feels good about to do better for her family.

Annie’s is a mainstream success story and the purpose of this slide is to frame up kind of how we see the world and where we sit in it. On the right hand side of this page, you can see the total the U.S. market size for natural and organic at $41 billion. This is a really creative space but really interesting relevant things and interesting innovative things for consumers happen in this space. But as you can see it’s much smaller than the total U.S. food business on the left hand side the page at $2 trillion. However, it’s growing much faster.

Over on the natural side, there are a lot of innovative small brands but there are very few of those that had successfully retained their authenticity as well as crossed over to compete directly for these consumers with mainstream conventional package goods in places where consumers want to shop, means, in grocery, natural stores.

On the other hand, you have smart deeply resourced BcBg food companies on the left hand side clearly recognizes consumer opportunity and see a lots of opportunities against it and have tried to acquire small brands and grow them as well as to introduce organic line extensions in their existing brands. And the vast majority of those efforts have failed particularly the second and the reason is that consumers of core natural and mainstream crossover consumers seek authenticity and they want to trust the brand that they are buying to deliver the benefits that it’s promising.

So in the middle, there are few brands that are examples of where we play. I don’t feel Barn is now on by the known over a process of time. But it’s close to $400 million business and Kashi natural organic brand that was acquired by Kellogg when it was small. We estimate at least $500 million, maybe $600 million. But those are examples of brands that have done what we are doing and we are in the earlier stages as an LTM business was about a $147 million of revenue facing up to big categories. We are very optimistic about our ability to grow the business overtime.

We are widely available where consumers want to shop as well. We grew; we’ve grown from our core position in natural channel which is still about 27% of our business into mass and grocery as you can see on the pie chart here. I will make a comment about natural, the natural channels. Natural channel is incredibly important to us. It’s the spiritual tip of our sphere. It’s where a lot of our innovation and our effort at authenticity go. And we have a very vibrant business there and we invest heavily to make sure that that business is successful and the retailers we do business with their continued to have a strong point of difference.

That said we’ve also seen significant opportunities to grow the brand in grocery and mass. We are doing business with all these retailers here and as you will see in a moment, we have significant opportunity to expand and broader our business base. All these businesses are performing well over an LTM basis through the end of June. Our natural business is up 16%, grocery 14%, and our mass and other business up 31%, so all very healthy.

And the most exciting part of our Annie’s is the growth opportunities for the brand. We are leveraging very important market trends. First of all, a long-term secular shift like consumers toward eating healthier. And as retailers seek to please and meet the needs of this consumer, there is a growing for distribution and expanding market for organic products. So against that backdrop, there are four core strategies that we’ve been driving for growth.

We are expanding distribution particularly in grocery and mass, improving placement in the store because where we are in the store is as important or more important than being in the store to begin with and we will talk about that in a moment. Continuing to drive winning innovation, we have an exciting pipeline of innovation that’s been developed over many years and an innovation culture that’s focused on developing exciting unique products and last, increasing household penetration. So our efforts at broadening distribution, improving placement driving innovation will drive higher household penetration as well as innovative marketing to continue to connect with more consumers.

The important part of our growth strategy is that these are not new strategies for us. This is basically what we’ve been doing for at least a decade that I have been involved and even before that or more than the decade than I have been involved here. And there is no big get. It’s all about execution. These strategies that worked well in the past and we are going to continue to executing them in the future.

First on to the expanding distribution point. As we said right now, on the page, you can see the ACV, all-commodity volume distribution level of our purple box macaroni and cheese product was the highest distributed item in mainstream grocery presently sits at $67% ACV. That’s a rough approximation of the store footprint that we have in grocery across the U.S. And you can see – looks like there is a slight problem with the Cheddar Bunnies but that’s 49%, it should be 49% didn’t come across in the graph and then lower levels on the other item.

And we also see the opportunity for peak distribution in each one of these categories at 75 to 85 ACV, probably 85 ACV in Mac and cheese because we are more developed there and we see a straight forward runway to that. And about 75 ACV, I mean, the other categories in mainstream grocery. And that’s largely driven by retailer development and commitment to natural and organic products in their section.

And also on the distribution side, we have lots of opportunity to develop breadth underneath our number one SKU so the drop offs in distribution levels from our number two, three and four skew which are very strong sellers is pretty significant. So we are going to focus on building that out.

I mentioned before where we are is really important in this stores. So we are focused on mainstream place because it drives a much higher share and growth opportunity for both us and the retailer. And as an example of that I am going to update you on our Mac and cheese case study. So right now, we have a little over $5 a share approaching $6 a share on a national basis in the macaroni and cheese category. However, when we get on the mainstream item, so when we are not in the natural section, where we are next to the mainstream CPG brand leader, where we get competitive pricing on everyday basis 25% to 30% premium and we get from merchandising, our share in change that meet that criteria and our cost to 17% with a range of 11 to over 30.

And this is not surprising, busy mom’s are looking for healthy alternatives and when we are in the mainstream they are looking for convenience and ability to shop and comparing the mainstream CPG brands in all our categories we see strong results. What’s interesting to is that the retailer wins as well because retailers that have strong mainstream natural organic positioning and that’s just for Annie’s but in other categories. Also generally – there is a general word outperforming other retailers in their market, we are bringing new consumers into the category, we are trading a few consumers I am sure but the biggest impact we have is we bring incremental consumption into the categories, higher dollar range for the retailers, higher sales growth and higher profitability.

An update on our mainstream initiative. Over the past few calls and meeting we’ve been talking about this. For a little over a year, we’ve been selling our macaroni and cheese against this mainstream initiative and the May time frame of this year we began selling the same story with the same basic set up facts in our other categories, grahams, fruit, snacks, and dressings and Cheddar Bunnies, snack crackers and we’ve been seeing very strong results.

Our momentum is accelerating during the last quarter. We had 25 wins, about 15 of those wins where in macaroni and cheese. The rest were in other snack categories which we had more recently been selling the story. Importantly, we are driving deeper distribution on what our key 33. Those are our best-selling items across all categories. We really focused on driving deep distribution in mainstream. Our distributional levels year-over-year through the beginning of June time frame were up 17% on those 33 SKUs. So we are definitely building distribution and moving product to the right part of the store.

The third driver is innovation and we have a strong track record of innovating. When I entered Annie’s in 1999, it was basically a pasta company with a really strong core unique brand. In 2003, we launched that cheddar bunnies line which is the second purple box there. And that was so successful that subsequently we have continued to innovate and take the brand into other important categories that are relevant to mom, kids and family as I mentioned earlier and it seems very strong results.

We have over 125 products today. 19% of our net sales from LTM period came from products that we introduced since the beginning of 2010. So a strong innovation pipeline is a very important part of our past as well as our future growth. And our most recent product introduction was into the Rising Crust Pizza business for frozen pizza business. And so I will be talking about that now.

So to remind those who may not be familiar with it. In January of 2012, we launched certified organic Rising Crust Pizza on an exclusive basis into leading natural organic fruits retailers. We have driven strong share, we are driving incremental category growth and we receive very, very strong feedback from consumers of the product. Part of our original plan, after we achieve success with the certified organic launch was the launch what we call Made with Organic. And what that this three SKUs, cheese, pepperoni, and a barbeque chicken pizza that are made with ingredients that organic to the 70% level. They are basically the same great tasting product. They are just using natural anabolic rather than certified organic meats.

And those products are – we began to introducing those and talking to retailers about them in the March time frame and we’ve seen strong pickup and success. You can see the frozen pizza market is a $4 billion market. It’s very big, it’s like natural organic is very small but it’s growing rapidly. And right now, when we went up to market, we focused on 25 key retailers in high brand development index and category development index for markets for Annie’s and retailers that did well of natural organic. And we’ve seen very strong pickup where we mentioned on our last call that we are about a quarter ahead of our expectations. We see strong momentum in that business. We are shipping into the first 20500 or so points of distribution in the quarter that we are in right now. And it’s happening faster mainly because retailers are excited about the offering. They see this unique and differentiated and they want to get on the shelf so their consumers have the opportunity to buy.

It’s important to point out that that frozen pizza is just the first innovation we plan to do in the frozen. We are doing primary development work now and in fact it’s part of our regional strategy to look at frozen, we still – the entire category out for segments that Annie’s can play in. And we’ve got a good track laid out in the future although we haven’t committed to the date or the timing of our next innovation in frozen. We are certainly working on it and we want to be in a position to do that when the time is right.

So we have a big opportunity to increase also penetration. Right now, we look at the marketplace for U.S. the households with children under 18 who have income – household income over $50,000, there is 22 million of those. If you further screen for the psycho graphics, willing to pay more for healthy food as 19 million and today our best distributed item and most probably distributed item is natural Mac and cheese which is 4 million of those household. So we have a long way to go against that target.

And also our other categories that are more recent introductions are in even smaller footprints of household anywhere from 500,000 to a 1.5 million to 2 million household. So we have a lot of opportunity to grow. And the way we are going to do it is driving the leverage I mentioned earlier distribution gains and placement, focusing on cross-selling and existing these consumers into new categories if they are not buying today. But they love the brand; they are just not aware where these other categories and connecting with prime prospects who are seeking healthier food alternative.

Innovations is an important part of this as well. When we do research with consumers, one of the most common thing s we hear from Annie’s consumers is I love you, do more for me. And what they are really saying is my kids love Mac and cheese, my kids love fruit, snacks, can you do more products for my teens, can you do more product for my whole family, can you give me more all family meal occasions. And so organic Rising Crust Pizza is obviously part of that strategy, I need to expect more from that in the future.

So with that, I will turn it over to Kelly and she can take you through our financials.

Kelly Kennedy

Thanks John. So we are pleased to share with you today some of our recent financial results. These results are in excess of strengthening consumer trends around natural organic, the power of our leading brand as well as followed execution across our growth initiatives that John outlined.

If you can see in the top left, over the past five years, we’ve grown our net sales by approximately 17% on a compound annual basis. We closed our fiscal year 2012 on March 31th of 2012 and we also updated LTM which add one additional quarter our Q1 which ended on June 30th. As you can see, net revenues increased LTM to $147 million which reflects 20% compound annual growth.

All our channels performed well. As you can see in this top right, we report our net sales by product category which includes meal, snacks, and the other categories which includes dressings, condiments, and other. As you can see here, meal is our largest category representing 44% of our net sales. And on an LTM basis, it grew 26% over prior LTM. And that’s reflects 40% of our net sales and grew 23% on an LTM basis. And then dressings, condiments and other reflect 16% of our business were not a primary growth driver. It’s a followed business for us.

As you can see in the bottom left, gross margin for fiscal 2012 as well as on an LTM basis was 39.2%. This is an 800 basis point improvement since we launched what we called our hybrid model in 2009. What the hybrid model represents is a combination of contract manufacturing to source our products prepared with full bottoms up costing arrangement to provide us a significant degree of transparency as well as the opportunity to drive cost out of the supply chain.

This isn’t asset like model. They can be quickly and efficiently scale to support our growth.

And on the bottom right, if you can see over the past 12 months, adjusted EBITDA which adjust for both non-cash as well as non-recurring expenses increased to $21.7 million which is just under 15% margin.

Just want to speak really quickly about seasonality in our business. As you can see, both net sales and operating profit are highest for us in Q2 and Q4. Q1 which is the quarter that we just closed on June 30 was the smallest volume quarter. As you can see in these charts, Q1 we delivered 20% growth in the first quarter and operating margin of 10.5%. As we expected our operating margin in the first quarter was impacted by higher SG&A expenses, we made significant investments both in people as well as infrastructure to support our growth in operating as a public company.

As a result of these investments we have really strong foundation on which we can scale our business quickly. And we expect to see stronger operating leverage over the course of the year as we move into our larger sales quarters.

Moving onto some of the highlights from our first quarter. As you can see net sales of $34.3 million, gross profit of $13.8 million, operating income of $3.6 million and net income of $2.1 million of $0.12 per diluted share. Consumption was strong across all three channels and in aggregate average 16% to 18%. We did see the acceleration of consumption trends that we talked about in Q3 and Q4. They did continue on abated into Q1. And in Q1 we did make a decision to accelerate some R&D spending versus our original plan. It allowed us to accelerate the timing of some incremental snack line extensions which will be beginning to shift in the fourth quarter.

And finally turning to the balance sheet. We paid all our outstanding debt during the first quarter primarily with the proceeds of our initial public offering. And we closed with just over $5 million in cash on our balance sheet. And during Q1, we also transitioned to a new larger warehouse facility and as well as, as of July 1st, we are now operating out our new Tier 1 ERP system. It’s a lot of great success to talk about in Q1.

In closing, we are pleased with our financial performance in the first quarter. We are optimistic about 2013. Over the coming year, we will continue to focus on the four important growth strategies that John outlined will remaining true to our mission and the core values that got us here.

I am going to turn it back over to John to close up on our investment highlights.

John Foraker

So just to wrap, this is a great sector. We see strong trends and we really believe natural organic is in the very early innings of what is going to be in total U.S. food and Annie’s is in the very early, we are going to do as a brand. We have a very strong brand. It’s unique, it’s differentiated. We have leading share in big huge categories that are highly relevant to our core consumer and we have a lot of momentum in those categories.

We delivered strong financial performance. We have an attractive business, a strong team with lots of organizational debt that you need united by belief in a common culture and mission. And most importantly we have a huge platform for future growth. We have millions of loyal consumers. We are a relevant for where those consumers are and we are up and coming, Millennials are going. And we think that we have a tremendous opportunity to grow this business and this brand into the future.

So we are just in the beginning of what we think we can do and really appreciate your time and attention today. That’s it. Thank you. So we have time for just a few questions although we have to get back to the work, we have our annual meeting next Monday, we have some work to do to be ready for that. So if there any questions, we will be happy to take that.

Question-and- Answer-session

Unidentified Analyst

Thank you. To start off with, big part of the story is clearly getting ACV up to much higher levels, some of your kind of core products, some of the new ones that come out recently. Can you sense for a timeline? How quickly some of these ACV gains we made from – you know in one case where you wanted to go from 50 to 75, in other cases quite a bit lower than that 75. Are we talking given what you have seen in terms of acceptance in mainstream channel rapid acceleration in that relative to how long you may have taken to get to six year or something for your original products?

John Foraker

Compared to the time it took for original products get there, it’s going to very rapid. Our first Mac and cheese product was introduced over 20 years ago and as I mentioned before 67 ACV is the first – is where our highest distributor item as of today. We see those numbers increasing significantly over the next year or two. What’s happening that’s a little bit different in our business now is we’ve been out selling and telling the story about mainline distribution and how impactful it can be for retailers for quite some time. What’s different is that last year, we really quantify that into a compelling data driven story that we could take to retailers to say, here is what it’s doing for other retailers in other markets that are competing effectively in this area. Here is what it’s doing to their volumes, to their profitability. So we created a better business case.

And then the other thing that’s important to is that as a general rule retailers have been moving away from natural organic standalone sections for a while. That is accelerating and virtually every retailer in the United States, big grocery retailers on that path and we are seeing major wins and breakthroughs at places that we really could have only dreamed about 10 years ago. So we expect that we are going to see strong distribution gains for the next three years across the core categories we already in and also say that we are getting because the organization, the brand is getting bigger, the organization has better capabilities and deeper capabilities that had in the past. We are able to get things that are new into higher levels of distribution faster as well.

Unidentified Analyst

Is there any appreciable differential in market structure as you go from the core natural organic channel in the mainstream?

Kelly Kennedy

Yeah. There is no material difference between our margin structure both across channels as well as across product categories.

Unidentified Analyst

And then one more from me just in terms of we talk about this a little bit earlier, it can be hard to parts out exactly but your sense on the growth you are seeing in kind of a like-for-like basis in the channels where you already sort of exist versus the growth that’s coming obviously from the distribution build out?

John Foraker

Yeah.

Unidentified Analyst

Do you think pretty significant growth overall, you did fairly balance between the two?

John Foraker

It’s fairly balanced. We are definitely getting growth from distribution but our core distributions are long standing stores where we had Annie’s Inc for a long time. We are seeing very strong fundamental trends there. The meals category, you’ve seen a real acceleration in that business over the last couple of quarters in our reported numbers. The mainline initiative and getting better placement is certainly part of that but that’s just a very healthy category. And if you step back and look at what consumers are focusing on right now, the consumers that Annie’s appeals to which tends to be little higher income, 70k income plus consumers, they tend to be more educated, they tend to be natural and organic focused looking for those alternatives. They are spending on products like Annie’s right now. So we are seeing strong velocities or same for same basis across all of our business right now.

Unidentified Analyst

There is no more out here. You have one.

Unidentified Analyst

Sorry, I didn’t quite catch. On the pizza, what’s the organic composition of your frozen pizza?

John Foraker

So on certified organic, we are certified organic under the USDA regulations that require 95% of the material by weight is organic certified and it’s been certified. On the Made with Organic product, the same USDA regulation to make organic claims on the front of a package of any kind such as made with organic wheat, and tomatoes or cheese, you have to have 70% or more of the ingredient content be certified organic and that’s where we are.

Unidentified Analyst

Sure.

Unidentified Analyst

Thank you very much to Annie’s for being here, really appreciate it and safe travel. Thank you.

John Foraker

Thank you so much. I appreciate it.

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