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Corrected Transcript

1-877-FACTSET www.callstreet.com

Total Pages: 20Copyright 2001-2012 FactSet CallStreet, LLC

30-Oct-2012

Annies, Inc. (BNNY)Q2 2013 Earnings Call

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Corrected Transcript30-Oct-2012


2Copyright 2001-2012 FactSet CallStreet, LLC

CORPORATE PARTICIPANTSCORPORATE PARTICIPANTSCORPORATE PARTICIPANTSCORPORATE PARTICIPANTS

Erica AbramsCo-Founder & Managing Director, The Blueshirt Group LLC

John M. ForakerChief Executive Officer & Director, Annie's, Inc.

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc.

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTSOTHER PARTICIPANTSOTHER PARTICIPANTSOTHER PARTICIPANTS

Jon R. AndersenAnalyst, William Blair & Co. LLC

Rachel Naseem NabatianAnalyst, Credit Suisse Securities (USA) LLC (Broker)

Edward AaronAnalyst, RBC Capital Markets Equity Research

Scott Van WinkleAnalyst, Canaccord Genuity, Inc.

Christopher R. GroweAnalyst, Stifel, Nicolaus & Co., Inc.

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey

......................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTIONMANAGEMENT DISCUSSION SECTIONMANAGEMENT DISCUSSION SECTIONMANAGEMENT DISCUSSION SECTION

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Annie's, Inc. Second

Quarter Fiscal 2013 Earnings Conference Call. During today's presentation, all parties 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, October 30, 2012.

I would now like to turn the conference over to Erica Abrams of The Blueshirt Group. Please go ahead, ma'am.......................................................................................................................................................................................................................................................

Erica AbramsCo-Founder & Managing Director, The Blueshirt Group LLC

Hello, and thanks for joining us today as we report financial results for the second 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 and consumption trends for natural and organic food products; and our expectationsconcerning market position, financial performance, and operating information.

The forward-looking statements made on this conference call are based on management's current expectations as

of today's date only, and are subject to uncertainty and changes in circumstances, and are therefore subject to

significant risk. 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.

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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 the Risk Factors section of our filings with the

SEC, which are 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 attachment today is as of October 30, 2012,and we undertake no duty to uptake 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 may be. 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.

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

......................................................................................................................................................................................................................................................


Hello, and thanks, everyone, for joining us today as we report our fiscal 2013 second quarter financial results. We

know it may have been difficult for some of you to make this call today, so we're really grateful for your

participation. We hope that you, your families, and friends are all safe.

Our strong second quarter results were driven by robust consumer trends and execution of our proven growth

strategies. We achieved 20% top-line growth, or $46.7 million in net sales, and adjusted net income of $4.2

million, or $0.24 per share. In light of our strong growth in the first half, current sales momentum, and our

confidence looking ahead, we are now raising our full-year sales guidance from a prior range of 16% to 19% to a

new range of 19% to 21%.

In the second quarter, we continued to focus on our four strategic growth drivers: first, expanding mainstream

distribution; second, improving placement locations in stores; third, increasing Annie's brand awareness and

household penetration; and finally, continuing to deliver exciting innovation that our consumers love.

We made good progress during the quarter in each of these areas. The consumer opportunity for natural and

organic alternatives remains very strong. More and more consumers are seeking cleaner and simpler food options

for their families.

Against this favorable consumer backdrop, we continue to experience strong consumption trends. During the

quarter, we saw year-over-year consumption growth in our key product categories, retail channels, and top

customers that was in the mid to high teens, very consistent with our trends over the last three quarters.

Our mainline initiative, where we are moving our best-selling items out of standalone natural sets and into

mainline grocery aisles, progressed nicely. During the quarter, we made significant progress against this initiative

placing approximately 17,000 SKU points of distribution in grocery mainline sets. About two-thirds of these

placements were moved from natural sets to mainline sets in the same store. The remaining placements were

incremental points of new mainline aisle distribution.

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Our mainline wins were most heavily focused in macaroni and cheese, primarily because we've been making that

case to retailers for a longer period of time. During the quarter, and Annie's macaroni and cheese consumption

grew by more than 20% in grocery and mass channels, clearly benefiting from improved placement, deeper

distribution, more competitive price points, and stronger merchandising.

We are gaining similar traction in our other product categories, such as grahams, snack crackers, fruit snacks, anddressings, and we expect to benefit in the future as a result.

Our second quarter is a big merchandising period for Annie's and our retailers around consumer back-to-school

programs. We experienced very strong retailer merchandising and consumer response to these programs across

all of our channels, particularly for mac and cheese. In fact, August was our single-largest sales month in company

history. That was followed by continued strength into September, so much so that unfortunately we experienced

some shorts on our top items during the last three weeks of the quarter. As a result, we were unable to fill

customer demand, which we estimated cost us about $1 million in net sales in the quarter.

This had nothing to do with either availability of ingredients, aggregate production capacity at our manufacturing

facilities, or our ERP implementation. Simply put, our forecasting and production planning processes

underestimated demand in the quarter, and we were slow to adjust and catch up. We've taken a number ofcorrective measures to improve the process going forward, and our customers have been very supportive. Fill rates

are now back to normal high levels and business as usual.

Now I'd like to provide you an update on the progress of our innovation execution. In January 2013, we will begin

shipping two line extensions to our snacks business. We are presenting these items and products to retailers at

this time, and the reception thus far has been very good.

The first extension is in our grahams category. We are introducing two certified organic SKUs of conventional-

style flat graham crackers. Flat grahams, like the ones you make S'mores with, are more than a $150 million

segment of the $330 million U.S. grocery graham category, and this is a segment in which we do not presently

compete.

We have a great opportunity to position a cleaner, healthier, certified organic alternative to the mainstream

conventional brand. This extension will be incremental and gives us the opportunity to expand our graham share

in all channels.

The second extension is in our cracker business. We are introducing a line of certified organic and made-with-

organic cheddar squares. This familiar product form represents more than 30% of the $1.2 billion snack cracker

category in U.S. grocery. Our new cheddar squares will age us up into more all-family usage occasions, particularly

with teens and millennial consumers. Again, we have a nice opportunity here to position a cleaner, healthier

alternative to the mainstream brand leader.

Both products deliver great taste, and based on our testing, Annie's consumers are very excited by them. We

expect solid and incremental sales contribution from these line extensions going forward in coming years.

In Frannie, our frozen category initiative, we continue to make solid progress. We began shipping made-with-

organic rising crust pizza into more than 2,500 highly targeted grocery points of distribution in the second

quarter, about a quarter ahead of our expectations as we entered the year. Our goal with the initial placements is

to build a strong track record of success with each account such that we are well-positioned to expand our

distribution footprint with these retailers as we go into our fiscal 2014.

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In addition, we've begun selling these items to independent natural foods retailers with great success, and we

expect to have a large distribution footprint in the natural channel by the end of our fiscal year.

Retailers in all channels are enthusiastic about these new pizza offerings. We are pleased with the retail price

points we are securing and with the strong overall retailer support we are receiving for this important growth

initiative. Because of the strong reception we've received to our initial launch of pizza, we remain optimistic aboutthe potential for Annie's in frozen. While it is only the beginning, we are seeing very encouraging initial velocity

reads from early placements that have been made-with organic pizza items.

As a result of our success thus far, we are actively developing additional products for other frozen categories that

we expect to bring to market in the 2014 and 2015 timeframe. We will keep you updated on the progress of these

initiatives over coming quarters as we get closer.

We are pleased with where we are through the first half of the fiscal year and our first six months as a public

company. We are making good progress in the development of our business, and we are confident in our outlook

and our strategic initiatives.

I'm particularly proud of our people, and thank them for their continued hard work, our many accomplishmentsthis quarter and year-to-date, and most importantly for their commitment to Annie's mission and values.

Now I'll turn the call over to Kelly Kennedy for more financial details about the quarter.......................................................................................................................................................................................................................................................


Thanks, John, and thanks for joining us today as we report our second quarter financial results. As John

highlighted, net sales for the quarter were $46.7 million, up 20.1% over the second quarter of fiscal 2012. Similar

to Q1, volume was the largest driver in our year-over-year growth, driving it approximately 17%, with the balance

coming from higher average selling prices.

As a reminder, we completed a secondary offering during the second quarter, which resulted in one-time costs of

approximately $700,000, or $419,000 net of tax. There were no proceeds received by the company and no change

to our share count. Throughout my prepared remarks today, I'll discuss our financial results excluding these one-

time costs associated with the secondary offering.

Adjusted net income for the second quarter was $4.2 million, or $0.24 per adjusted diluted share. This compares

to $3.6 million, or $0.22 per adjusted diluted share, in the same period a year ago. EPS in the second quarter was

based on our diluted share count of 17.7 million, as compared to an adjusted diluted share count of 16.2 million in

the same period a year ago. The share count increase was primarily due to the 950,000 shares issued in the IPO in

April, combined with approximately 400,000 shares from stock option exercises year-to-date.

In the second quarter of 2013, we accelerated the rollout of our made-with-organic pizza products, whichincreased costs by approximately $400,000 overall in the quarter. We had promotions and slotting fees that

impacted gross margins, as well as other marketing expenses in SG&A. The net impact to the bottom line for the

quarter was approximately $0.01 per share. This small investment will benefit us in fiscal 2014 and beyond.

Our effective tax rate in Q2 was 40.5%. We expect our full fiscal year 2013 tax rate to be 40.7%. As we discussed on

our last call, this is higher than we had originally planned.

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Now I'd like to share some color on our net sales result by product category for the second quarter. 47% of net

sales were from meals, up from 43% in prior-year second quarter, reflecting 31% year-over-year growth. Meals

growth was predominantly driven by our mac and cheese line, but also benefited from sales of organic and made-

with-organic pizza.

41% of sales were from snacks, up 17% over the prior year's quarter. We saw a strong rebound in snack salesversus the prior quarter, which was impacted by the mix of business towards meals. 12% of sales were from

dressings, condiments, and other. Over time, we expect this category to contribute less to growth as we experience

more growth in meals and snacks. As a reminder, you can find quarterly net sales trends by product category on

our website in the Investor Relations section.

Now moving to margins, gross margin for the second quarter was 38.3%, up 190 basis points over the prior-year

second quarter. The year-over-year increase was primarily related to trade efficiencies as we continue to improve

the effectiveness of our promotional programs, and was partially offset by the margin impact of slotting and

incremental trade programs made in the quarter to support our made with pizza launch.

As a reminder, we experience volatility from quarter to quarter in our margins based on product mix and timing of

promotions. We still expect margins in the mid-39%s for the fiscal year.

We are experiencing higher commodity costs in fiscal 2013, which we planned for. We implemented a pricing

increase of approximately 3%, which took effect this month, and laps a similar-size increase from October of 2011.

We also expect modest increases in key commodity prices in fiscal 2014. We expect to continue to offset higher

commodity costs with pricing and our Fat Rabbit projects, as we have in recent years.

Now turning to adjusted selling, general, and administrative expenses, where we have both fixed and variable

components, in the second quarter, adjusted SG&A increased $2.8 million to $10.8 million. SG&A spending in

fiscal 2013 reflects the planned increases in investments we are making in people, infrastructure, our brand, and

innovation to drive growth and to support our public company status.

Adjusted operating income for the second quarter was $7.1 million, up 16% over the prior year. Adjusted operatingmargin for the second quarter was 15%, bringing us to an adjusted margin of 13% year-to-date.

Turning to our cash flow, we generated $9.1 million in free cash flow this quarter. As a reminder, our asset-light

hybrid supply chain model is efficient and generates a strong cash return on invested capital. We ended the

quarter with $14.6 million in cash on our balance sheet.

The free cash and our cash balance was somewhat higher than we expected because of lower-than-typical

inventory levels and the tax benefit from stock option exercises year-to-date. We spent $274,000 in capital

expenditures this quarter, primarily related to investments in our Fat Rabbit projects.

In closing, we are pleased with our solid financial performance in the second quarter. Strong consumer trends,

combined with a continued focus on our strategies around distribution, placement awareness, and innovation

continue to overdrive our top-line results. As a result, we are increasing our full-year net sales guidance to 19% to

21%, which reflects fiscal 2013 net sales in the range of $168 million to $171 million.

We expect adjusted net income in the range of $14.2 million to $14.5 million, which represents year-over-year

growth in the range of 25% to 27% on an equivalent tax basis. The new adjusted EPS range for fiscal 2013 is $0.79

to $0.82, which reflects a tax rate of 40.7% and 17.9 million diluted shares outstanding.

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Relative to our original guidance, the higher expected tax rate reduced EPS by $0.02 per share this year. Over

time, we are confident in our ability to deliver stronger operating margins and higher net income and EPS

leverage.

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


Thanks, Kelly. I'm happy to report that retailer and consumer interest in natural and organic has ever been higher.

We are in the early innings of our opportunity to build mainstream distribution on our existing items and to grow

our brand footprint with exciting innovation. Our strategies are working.

As an organization, we're growing fast, and we're culturally committed to continual improvement and winning for

our shareholders, business partners, employees, and consumers. We're excited about the opportunities that lie

ahead, and we look forward to reporting more to you in the coming quarters. Thanks.......................................................................................................................................................................................................................................................

QUESTION AND ANSWER SECTIONQUESTION AND ANSWER SECTIONQUESTION AND ANSWER SECTIONQUESTION AND ANSWER SECTION

Operator: Thank you, sir. [Operator Instructions] Our first question is from the line of Jon Andersen with

William Blair. Please go ahead.......................................................................................................................................................................................................................................................

Jon R. AndersenAnalyst, William Blair & Co. LLC QHi. Good morning, everybody.......................................................................................................................................................................................................................................................


AHi, Jon.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AHi, Jon.......................................................................................................................................................................................................................................................

Jon R. AndersenAnalyst, William Blair & Co. LLC QGood afternoon, I should say. I wanted to start out by asking you about just some of the key two of four key

growth drivers. John, you talked about the focus on improving distribution in mainstream doors as well as

improving the location of your products within existing doors. Could you just give us a little bit better sense of

kind of where you sit today with respect to those initiatives? I'm trying to understand kind of what inning are we

in and how much opportunity is left there in the base business. Thanks.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. ASure. Sure, so we're in the early innings. The way to think about it is in two ways; first, in terms of depth of

distribution on our existing items. Our best-distributed item is our purple box macaroni and cheese product,

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which right now is in the high-60% ACV range in U.S. grocery. The next item in that line would be in the mid-

50%s approximately. There's a significant drop-off below that. And when you look at our other new product

categories or newer product categories over the last five to seven years, most of them are at ACV levels on the best

item that are in the 30%s. So we see significant opportunity to go deeper in mainstream grocery.

And second, and very related to that, we talked about in this quarter the impact of moving items, SKUs over fromnatural sections into mainline aisles. That's been an initiative that we've been working very hard on for the last 18

months is really, really bearing fruit. And it's bearing fruit not only because we're doing a really good job

communicating the retailer story and the consumer story and why the products will deliver incremental sales

growth, incremental profitability, and category outperformance for the retailer, but also because we're just we're

in the right place at the right time.

Most of the big chains in the U.S. are actively seeking opportunities to develop better and bigger business

opportunities with the natural and organic-inclined consumer, which, as you know, tends to have a higher income.

They tend to be more loyal to the stores they shop, and they've got a really profitability basket. So we're seeing a

lot of success in moving into the mainline aisles. And when we move into the mainline aisles, very often we're

expanding our ACV footprint opportunity with the chain because, lots of times, the natural sections somewhat

delineate a smaller universe of stores you can get in within that chain.

So we think we're in the early innings of that. The other thing, Jon, is that the innovation that we've been doing

over the last few years and are continuing to do is benefiting from this same trend. So, as we're going in and

resetting in the mac and cheese category, delivering strong results, it's creating a narrative which is true that is

spreading through the chains, that that opportunity exists in other categories where we have our strong brand and

can represent the same growth opportunity for consumers. So we've had success more and more over the last

couple quarters in particular at selling that same story and growth opportunity to retailers in categories like fruit

snacks, snack crackers. So we think we've got a long way to go, and we're very early.

And then the other thing is we have a very deep innovation pipeline. We mentioned that we've talked a lot about

frozen pizza, and I made it clear in my opening remarks that frozen pizza was really just part of much broader

strategy for Annie's in frozen. And we see the same opportunity in those categories as well, positioning Annie's asthe national and organic, cleaner, more premium alternative to the mainstream brand, that appeals to this

consumer's need and desire for better products that they feel better about giving their family. And so I think you

can view our business as a cycle of innovation, coming in, securing that position in the category, and building out

distribution, and both those strategies work well together. So I think we're in the early innings.......................................................................................................................................................................................................................................................

Jon R. AndersenAnalyst, William Blair & Co. LLC QThanks for the color on that. I had one question on pizza. Can you help me understand where you are right now in

terms of the distribution for pizza, where you kind of expect to be, I guess, by fiscal year-end, and then, are there

any thresholds or any milestones you need to reach on pizza before you embark in other categories in frozen?......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. ASure. So I'll give you a little more color on where we want to be by the end of the year, and we'll certainly talk a

little bit more about this on our next conference call, as we get more and more information on how the items are

performing and how the distribution's rolling out. But as I mentioned on the last call and as I reiterated this call,

we've been targeting a list of about 25 top retailers across the country that we think have the right BDI, brand

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development index, category development index for pizza, stores where we can create a great footprint of initial

distribution to build out a success story.

So, by definition, we're going to these chains, and we're not necessarily saying we want to be in all of your stores.

In fact, in most cases, we're saying we want to be in this universe of your stores. We began shipping into about

2,500 of those stores during the second quarter. We continue to knock down additional chains and expect toknock down more through the third quarter. The pace of store resets will slow down a little bit in the third quarter

because we're ahead of the major category resets for frozen pizza, which will be in our Q4.

So we'd expect this 2,500 stores, plus the build-out in natural that I mentioned, to really take hold in Q3. We will

add some incremental stores in Q3 for sure. And then that sets us up really well for Q4 to deliver strong

performance at retail, a great story with the retailers, and then a big distribution expansion opportunity as those

resets for their main annual review get done.

It's important to note and just remind everyone that the distribution that we're picking up in grocery stores for the

most part on this 2,500 SKUs is coming outside of the normal category review windows. And that's happening, as

I've mentioned before, because the retailers are so excited about these products they wanted to bring them into

their stores earlier. That's a very good sign. It creates some challenges for us because, as we get into the sections,sometimes our placement's not optimal because it hasn't been a full category reset, but rather a bit of a plug-and-

play where they're pulling items that are underperforming out and putting Annie's in.

But, as a general rule, we're getting the price points we want. We're getting a lot of really good facings. We have

some work to do to improve our placement in some of the chains in terms of getting off the bottom shelf and

getting off of our side of the box, but we expected that. And so far the retailers have been very positive on how

we're doing.

By the end of this fiscal year, we expect to have significantly more distribution than we have now, and we hope to

see and we expect to see really strong retail performance through the whole rest of the year. I mentioned and

really wanted to imply we have seen some very strong early velocity results on the products, which we expected,

frankly, because they've tested so strong and we've seen the certified organic items perform exceptionally wellwhere they are. So I'd say we are on track, Jon, and that hopefully gives you a good idea how we see the year

rolling out.......................................................................................................................................................................................................................................................

Jon R. AndersenAnalyst, William Blair & Co. LLC QYeah, it does. I appreciate it. Just one more quick one, the guidance revision on the top line was more than we saw

on the bottom line. Did something change in there? Is your gross margin expectations lower because of some of

the slotting and incremental investment in pizza?......................................................................................................................................................................................................................................................


AYeah, Jon, this is Kelly. We still expect our margins to be in the mid-39%s, so that's similar to what ourexpectations were previously. Two things I'll point out is that we do have some headwinds with the tax rate. We

went into our original guidance with an expected tax rate of 39.5%. We now have a good handle. We've bumped up

to a higher federal rate. So our current tax rate estimate is 40.7%, so it cost us about $0.02.

If you actually look at our net income, we have tightened the range slightly. On a tax-equivalent basis, it's 20

while we've raised the top line's at 19% to 21%, net income growth is 24% to 27%.

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The only additional thing that I think we highlighted in our call is that we do have some incremental spend for this

year to support pizza because we are supporting it for three quarters. However, we are dynamically managing our

budget and we have done some shifting. And we do expect to deliver for the year slightly improved-very similar to

what we've been mentioning-slightly improved SG&A leverage over fiscal 2012 on an adjusted basis, as well as

having higher-slightly improved operating margin as well.......................................................................................................................................................................................................................................................

Jon R. AndersenAnalyst, William Blair & Co. LLC QOkay, great. Thanks for the color, guys. Appreciate it.......................................................................................................................................................................................................................................................

Operator: Thank you. And our next question comes from the line of Rachel Nabatian with Credit Suisse. Please

go ahead.......................................................................................................................................................................................................................................................

Rachel Naseem NabatianAnalyst, Credit Suisse Securities (USA) LLC (Broker) QHi, there.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AHi.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AHi, Rachel.......................................................................................................................................................................................................................................................

Rachel Naseem NabatianAnalyst, Credit Suisse Securities (USA) LLC (Broker)

QHi. So my question is regarding dressing and condiments. I know that you guys said that it's going to be less of acontribution as the other categories increase as a percent of your total sales. But just looking at the Nielsen data, it

looks like growth for this category has been accelerating, especially in the last month. So I was kind of just

wondering if there's anything in particular that's causing that and what your strategy with the category is going

forward.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. A

Yeah, sure. So I would caution you to really look at 12-week data. On a four-week basis, there can be volatility in

our numbers up and down just because of the timing of promotions year-over-year.

However, your basic premise is definitely correct. We've seen strength in our dressing business. We've been

focusing on building out more mainline distribution on dressing, making sure we have the right assortment and

the right price points, and we're seeing the benefit from that. We also believe that just generally improving

consumer confidence and consumers feeling a little bit better about their pocketbook is also helping them in this

category trade up. So we're very pleased with what we're seeing there. We're still managing that business for

modest growth and strong profitability, but we are seeing better-than-expected top-line trends than we would

have predicted earlier this year.

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Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. A

And the total category as we report, in terms of dressings, condiments, and other, and while looking flat and/or

down, we are lapping against the cereal discontinuation, which happened in the fourth quarter of fiscal 2012. If

you exclude cereal, we were up that category was up in a double-digits, consistent with what we saw last quarter.

......................................................................................................................................................................................................................................................

Rachel Naseem NabatianAnalyst, Credit Suisse Securities (USA) LLC (Broker) QGreat. Thanks, guys.......................................................................................................................................................................................................................................................


Yes.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AThank you.......................................................................................................................................................................................................................................................

Operator: Thank you. And our next question comes from the line of Ed Aaron with RBC Capital Markets. Please

go ahead.......................................................................................................................................................................................................................................................

Edward AaronAnalyst, RBC Capital Markets Equity Research QHi. Good afternoon.......................................................................................................................................................................................................................................................


AHi, Ed.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AHi, Ed.......................................................................................................................................................................................................................................................

Edward AaronAnalyst, RBC Capital Markets Equity Research QHi. You mentioned in your prepared remarks having missed some sales because demand was stronger than you

expected. I know you referred to it as kind of your top-selling items. Can you be a little bit more specific on where

you left sales on the table in the quarter?......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. ASure. It was mainly in macaroni and cheese, across our macaroni and cheese business, Ed. There were a few top

snack items where we saw some shorts as well.

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But, basically, the way to think about it, as we looked at what happened versus what we expected is we went into

this quarter with a much stronger footprint of distribution on our macaroni and cheese business, not only higher

ACV levels than prior year, which we obviously knew, but a lot more mainline distribution and much greater

retailer participation in the brand in giving us strong secondary merchandising opportunities.

And so when we went into July and August, we saw extremely strong macaroni and cheese business in that Augusttimeframe. And really early in the month of August it was very clear that we were going to shatter all records in

macaroni and cheese. And, unfortunately, we did not respond quickly enough to ramp the production up in our

manufacturing facility to be able to catch that demand before the end of the quarter. So we shorted a number of

customers across our top SKUs in macaroni and cheese, particularly in the last three weeks of the quarter.

And it's regrettable, and we absolutely could have done better. I'll take credit and call out when I think we've

executed well, but I'm also going to be very honest when we don't execute well, and this is an area where we could

have done a lot better in the quarter. I guess it's a good problem to have, to have very strong demand like that, but

we should have just executed better.

So we've taken a number of steps to make sure that we can avoid this kind of problem in the future, and I'll

mention a couple of those right now. We've relooked and reworked a number of our forecasting processesinternally. We also are subjecting our production planning to much more rigorous external management review.

The third thing we've done is that our manufacturing partner is actually adding a second smaller macaroni and

cheese facility into the same facility where we manufacture all of our mac and cheese products. And what that line

is going to allow us to do, it's going to allow us to do much faster cutovers on smaller secondary items that we're

maybe running short on so that we don't have to do major changeovers on our main line. Our main line is a very

high-speed line that can crank out huge volumes. And so when we stop that line to cut over to do a flavor

changeover, we're really reducing our efficiency.

The fourth thing we're going to do is that we're going to be much more careful and we're going to carry modestly

higher inventory levels on these very high-velocity SKUs, particularly as we go into key merchandising periods.

Back-to-school would be an example of a key merchandising period. Going into our Q4 timeframe and into theFebruary/March timeframe would be another one. We don't think it'll wrinkle the total inventory numbers

dramatically, but another $1 million or $2 million, most likely, on those items would be a good place for us to

invest in capital, so we're going to do that.......................................................................................................................................................................................................................................................

Edward AaronAnalyst, RBC Capital Markets Equity Research QGreat.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. ABut the net effect was, if you really step back and look at it, our growth rate for the quarter would have been

between two and three points higher had we executed well, and unfortunately we didn't.......................................................................................................................................................................................................................................................

Edward AaronAnalyst, RBC Capital Markets Equity Research QI understand. Thanks. And then as a follow-up, I know that small-dollar changes can impact your financial metrics

quite a bit, but I'm just trying to better understand the drivers of the SG&A de-leverage in the quarter. What were

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the I know you addressed it briefly in your comments, but what were the biggest contributors of the higher

costs? And then, also, how should we think about kind of your ratio of fixed versus variable SG&A components?......................................................................................................................................................................................................................................................


Yeah, the de-leverage was expected. We knew that the spending pattern on SG&A for this year was going to look alittle different than last year, mainly because, in fiscal 2012, so much of that investment was in the second half of

the year. Of course, as we move into the second half, we'll start lapping against those spendings a little in Q3 and

particularly in Q4.

But I do want to remind people that we have more than a third of our SG&A is variable, and that includes our

freight and warehouse, our commissions, and a portion of our marketing spends. And so I think as we move into

having much stronger top line, a portion of that does roll down to our SG&A. With that said, as we highlighted, in

our pizza spend, a portion of that was in marketing spend that we moved up. It was planned later in the year, and

we had moved it up into Q2, so we did have some incremental spending, that was more than we originally

anticipated, to support the pizza made-with launch in the second quarter.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. ABut we do expect stronger leverage in the second quarter, and in fact, that's implied in our guidance.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AIn the second half of the year.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AIn the second half, thank you.......................................................................................................................................................................................................................................................


Yeah.......................................................................................................................................................................................................................................................


And we expect that the second half of the year and into next year as well.......................................................................................................................................................................................................................................................


AYeah, and the total SG&A overall, our expectations are similar, that we'll have slight leverage for the full fiscal yearover fiscal year 2012.......................................................................................................................................................................................................................................................

Edward AaronAnalyst, RBC Capital Markets Equity Research QThanks, everyone.......................................................................................................................................................................................................................................................

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You bet. Thanks, Ed.......................................................................................................................................................................................................................................................


AThank you.......................................................................................................................................................................................................................................................

Operator: Thank you. And our next question comes from the line of Scott Van Winkle with Canaccord Genuity.

Please go ahead.......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. QHi. Thanks. I missed it if you gave it. What was the timing on grahams and cheddar squares? Is that this quarter?......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AWe are actually actively out presenting those to retailers right now. The first shipments will be in early January.

That's our plan.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. ASo fourth quarter.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AFourth quarter, beginning of our fourth quarter.......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. QGotcha, gotcha. And when you have obviously, you talk about slotting this quarter with pizza. When you have a

fairly meaningful new product effort coming in Q1 of next year, shipping grahams and cheddar squares, should we

be on the lookout for higher slotting around those launches?......................................................................................................................................................................................................................................................


Well, we will definitely spend some slotting on those launches, Scott, in Q4, but that's baked into the guidance that

we've just reiterated, and it won't be a material number overall, shouldn't be.......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. QGotcha. And then if we look at last year, Q3 of last year was a real strong growth quarter. Can you remind us what

was the driver behind that?......................................................................................................................................................................................................................................................

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John M. ForakerChief Executive Officer & Director, Annie's, Inc. AIt was off the top of my head, it was higher levels of distribution on macaroni and cheese, some expansion in the

mass channels, basically just solid execution of the same four strategies that we've been talking about here for

quite some time.

......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. QGotcha, so you're not cycling against some new product or something of that nature?......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. ANo, no. It's core base business growth that drove all of our growth last year, really; key items, expanding

distribution in all channels, and also strong acceleration in consumer trends which we really started seeing. We

were at a good level, but we ticked up to a higher level in Q3 last year, so it was really this last four quarters we've

seen a continuation of very consisting consumption growth.

......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. QGreat.......................................................................................................................................................................................................................................................


And the promotions we run, Scott, tend to be very similar year-over-year. There's no major shift. There are small

shifts in timing based on where holidays fall sometimes, especially when they come at the end of a quarter, but

overall, our general pattern this year is looking very similar to last year.......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. QGreat. And then could you give us a little detail on kind of the specifics behind the higher-than-expected tax rate?

Was there something you were expecting to come through that didn't come through, and is this a level we should

think about for subsequent years?......................................................................................................................................................................................................................................................


Yeah, this is definitely the level. We just ticked up to the highest federal tax rate. And we also did have had, if

you recall, I was talking a little bit about the shift to our customer pickups that are at our distribution center in

Illinois, we've had a shift over time with a little bit more concentration at Illinois, which is one of the highest state

tax rates when you apportion there for net income. But this is we don't expect any higher. This is a level wherewe could only in the future, if we had any tax-beneficial programs, could come off just slightly, but this is good

rate to expect. And mainly, we're just really getting better, and we finally have dialed in and we feel like we have a

good handle on the tax rate, and I think, coming into the year, the federal tax rate jumped up on us.......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. Q

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Great. And then, John, do you have any comments on next week's vote on Prop 37 in California and any

implications if it were passed for Annie's?......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. ASure. Well, the only comments I have is that we've been strongly in support of it. The fundamental propositionrequires labeling of genetically modified foods, and we think that's in the consumers' best interest to have the

information and make their own choices. We've looked at it, and if it passes, I think it's safe to say that it's very

likely to be held up in litigation for a long time.

We here in California are used to initiatives passing and having them be held up in the courts for some time. I

think our assessment is that if it does pass, it will be a net positive, clearly, for natural and organic products and

GMO-free products. The issues for us to watch out for are making sure that we're in a good position with respect

to the supply chain, if there's an acceleration in demand for some of those items, as bigger companies may switch

over. We don't really know the outcome right now. We're hopeful it'll pass, but there's an incredible amount of

money being spent against it right now, so I'd call it probably 50/50 at this point.......................................................................................................................................................................................................................................................

Scott Van WinkleAnalyst, Canaccord Genuity, Inc. QGreat. Thank you very much.......................................................................................................................................................................................................................................................


You bet.......................................................................................................................................................................................................................................................


Operator: Thank you. And our next question comes from the line of Chris Growe with Stifel, Nicolaus. Please go

ahead.......................................................................................................................................................................................................................................................

Christopher R. GroweAnalyst, Stifel, Nicolaus & Co., Inc. QHi. Good afternoon.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AHi, Chris.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AHi, Chris.......................................................................................................................................................................................................................................................

Christopher R. GroweAnalyst, Stifel, Nicolaus & Co., Inc. Q

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Hi. I had a question for you, first, just to better understand the sales growth guidance, and I don't know if there's a

way you can give any more color around it, but just to understand how pizza's contributing to that, for example.

And also, you had talked about these new snack products, but is that something that, now that they're out there

and developed, you add a little bit more to your guidance for those products, as well, as they ship in, in the fourth

quarter?......................................................................................................................................................................................................................................................


Yeah, we've been conservative in what we've baked into our guidance for those items, and typically would, be

especially in your first quarter of shipments. It'll take retailers a while to approve those items and then get them

set into category review. So we're expecting some modest positive impact in Q4, but that really isn't the driver. I'd

say we are definitely expecting some stronger growth from pizza year-over-year in the third and fourth quarter in

just progressive strength. But, really, the fundamental reason that we're raising the range and feeling very

confident about where we're at is that the two biggest drivers in our business right now are expanded distribution

of our best-selling items in mainstream grocery and also getting placed in better parts of the store, as we've talked

about earlier.

The third thing, which is also really positive and we are seeing this in our business, is our core business in the

natural channel remains very strong. We've seen continuation of strong growth trends with the independent

natural foods retailers as well as the supernaturals all this year, and we feel like we're in a good spot. We certainly

took the range up. We're going to do everything we can to continue to grow the business in a solid way. And we

just think we're in a we think it represents confidence in the future and that the fact that our strategies are

working.......................................................................................................................................................................................................................................................

Christopher R. GroweAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. And I guess somewhat related to that, I was trying to understand for you have an expectation for more of

your earnings in the second half of the year than you have historically. Is there anything to the phasing of the

year? I guess part of this is just due to the lapping of some of the costs from a year ago. Is there anything betweenQ3 and Q4 we should be aware, whether it be launch costs or that kind of thing or new product costs we need to be

aware of?......................................................................................................................................................................................................................................................


Yeah, the only thing I would point out is, you're correct, it has to do with the flow, mainly of the SG&A, over fiscal

2012 versus 2013, and for 2012, we began to make investments. We mentioned that we've added people, we've

added infrastructure, we began to incur some public company costs in the third quarter, but a little stronger in the

fourth quarter.......................................................................................................................................................................................................................................................

Christopher R. GroweAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. And then just one final question would be in relation to some you talked about some incremental

marketing costs you pulled forward. Last quarter it was some incremental R&D costs. If you look at those items in

particular, I don't know to what degree you can talk about it for the year in rough terms, but how much of, like,

sort of incremental investment are you making this year to put behind these new products, or how much got

pulled forward earlier in the year versus the second half of the year?......................................................................................................................................................................................................................................................

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Yeah, we had planned the spending that we did against pizza and some of the slotting we had actually planned

for later in the year, so it was really timing that pulled them up, but overall, it is a year of investment growth. We'll

be certainly making a little stronger support of pizza. However, we are going to be looking at some other programs

and managing the dynamically managing our budget just to shift some of those dollars. So, overall, we are we're not giving specific guidance, but we're expecting operating leverage in the second half as well as over fiscal

2012 overall. So, again, these are investments we're making that are really, the strength behind them will be in

2014 and beyond as we see some of these sales really ramp up.......................................................................................................................................................................................................................................................

Christopher R. GroweAnalyst, Stifel, Nicolaus & Co., Inc. QOkay. Thanks very much for your time.......................................................................................................................................................................................................................................................


You bet.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AThank you, Chris.......................................................................................................................................................................................................................................................

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Bill Chappell with

SunTrust. Please go ahead.......................................................................................................................................................................................................................................................

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey QGood afternoon.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AHi, Bill.......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. AHi, Bill.......................................................................................................................................................................................................................................................

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey QI don't know if you're willing to break it out, but just kind of because I'm looking at the meals growth, was much of

it driven by pizza, or was it really just the upside from the mac and cheese?......................................................................................................................................................................................................................................................


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Pizza actually drove a larger portion than it has kind of previously with the made-with and organic in the quarter.

We're not breaking out the specific, but it was material to the growth in the meals category.......................................................................................................................................................................................................................................................

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey QOkay.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AThe significant majority of it still is macaroni and cheese, and that business is really healthy.......................................................................................................................................................................................................................................................

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey QAnd I don't know the exact timing of these things, but I would think your finishing the bake-offs and excuse the

pun as you look towards the new listings for the spring reset, when will you have a pretty good idea of where

you're going to be added in and how big that could be in terms of revenue?

......................................................................................................................................................................................................................................................


We are doing a lot of bake-offs. That's a good way to put it. The way I think to characterize this is that on the last

call or at last quarter, we had really gotten through maybe seven or eight of the retailers on our top-25 grocery and

mass list that we were really targeting for these, we knew had locked them down. We've knocked down a

significant number more of those. We expect the vast majority of that list to translate over into pizza placements

before the end of our fiscal year. It's a little bit early to call the exact numbers because, oftentimes, the

presentations involve two or three rounds an initial presentation, a follow-up, some discussion of stores and

we're really working through that now. I can say that it's going really well and the response has been great, and we

think we're going to add a lot more stores.

And on top of that, I mentioned this strategy earlier, but we really believe that we have a great chance to perform

strongly in this footprint of stores that we're building right now, and if we do that, we think we're going to position

ourselves really well for the next set of reviews, which will be coming up, and a lot of those will be coming up in

the spring, February, March, April timeframe.......................................................................................................................................................................................................................................................

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey QGreat. And then just I guess one housekeeping, Kelly, I'm trying to get to 17.9 million shares for the full year. It

looks like you have to have about 18 million for the next two quarters. Is that right, or is there something I'm

missing from the 17.7 million that was in this quarter?......................................................................................................................................................................................................................................................

Kelly J. KennedyChief Financial Officer & Treasurer, Annie's, Inc. ANo. And I apologize. I'm rounding to 17.9 million. It's 17.85 million, but it's rounding up to 17.9 million. But you're

correct, we expect to build some additional shares over the next two quarters.......................................................................................................................................................................................................................................................

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey QOkay, and that's just from options exercising?

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20


Yes.......................................................................................................................................................................................................................................................

Bill B. ChappellAnalyst, SunTrust Robinson Humphrey

QGreat. Thanks so much.......................................................................................................................................................................................................................................................

John M. ForakerChief Executive Officer & Director, Annie's, Inc. AThanks, Bill.......................................................................................................................................................................................................................................................


Operator: Thank you. And I'm showing there are no further questions. So with that, we'll close the call. And if

you'd like to listen to a replay of today's conference, it will be available until midnight November 10 by dialing

303-590-3030 or 1-800-406-7325, with the access code of 4570831. This concludes our conference for today.

Thank you for your participation. You may now disconnect.

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