Boulder Brands' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.28.13 | About: Boulder Brands, (BDBD)

Boulder Brands, Inc. (NASDAQ:BDBD)

Q4 2012 Earnings Conference Call

February 28, 2013 09:30 ET

Executives

Carole Buyers - Senior Vice President, Investor Relations and Business Development

Steve Hughes - Chairman and Chief Executive Officer

Christine Sacco - Chief Financial Officer and Treasurer

Analysts

Ed Aaron - RBC Capital Markets

Scott VanWinkle - Canaccord Genuity

Andrew Wolf - BB&T Capital Markets

Jon Anderson - William Blair

Bill Chappell - SunTrust

Amit Sharma - BMO Capital Markets

Akshay Jagdale - KeyBanc Capital Markets

Operator

Good morning, my name is Tony and I will be your conference operator today. It’s February 28 and I welcome you to Boulder Brands’s 2012 Fourth Quarter Conference Call and Audio Webcast. This call is being recorded for playback purposes and will be available beginning two hours after the conclusion of today’s call. The playback will be available through March 14, 2013. The number for the replay is 1800-688-7036. You may also listen to the broadcast by logging into www.boulderbrands.com and in the Investor Center clicking on the link. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Some of the statements we will make on this conference call including statements about the company’s plans, strategies, beliefs, and expectations are forward-looking and subject to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from what is expressed in those forward-looking statements for a number of reasons including those risks and uncertainties disclosed in the company’s filings with the SEC and in its earning release. Now I’d like to turn the call over to Ms. Carole Buyers, Boulder Brands’s Senior Vice President, Investor Relations and Business Development. Please go ahead, Carole.

Carole Buyers - Senior Vice President, Investor Relations and Business Development

Thank you, Tony and good morning everyone. With me today are Steve Hughes our Chairman and CEO and Christine Sacco our CFO and Treasurer. Earlier this morning we issued our fourth quarter earnings release. If you’ve not seen the press release it’s available in the Investor Center page of our website at www.boulderbrands.com. The company’s terms organic net sales, brand profit, organic brand profit, cash operating income, organic cash operating income, net income and earnings per share excluding non-cash items and certain items, EBITDA and adjusted EBITDA as non-GAAP measures.

The company believes that these measures help explain its profitability and performance in a manner which is just potential investors and security analysts who evaluate our company. Brand profit is defined as gross profit, less marketing, selling and royalty expense income. Cash operating income is defined as operating income excluding stock-based compensation expense, depreciation, amortization, purchase accounting adjustments, restructuring acquisition and integration-related cost and certain other items.

EBITDA is defined as net income before net interest expense, income taxes, depreciation and amortization, adjusted EBITDA represents EBITDA as adjusted for stock-based compensation purchase accounting adjustments, restructuring acquisition and integration-related cost and certain other items. Organic measures are calculated and assuming that we owned Udi's during the fourth quarter of 2011.

The company believes that the exclusion of both non-cash and certain items help to provide a reflection of the operating profitability of the company and complements the company’s planning and forecasting models used in providing investors and security analysts with important supplemental information regarding the company’s underlying profitability and operating performance.

However non-GAAP financial measures should be viewed in addition to and not as an alternative for the company’s results prepared in accordance with GAAP. In addition the non-GAAP measures the company uses may differ from non-GAAP measures used by other companies. We have included in our press release reconciliations of each of the non-GAAP measures to the closest applicable GAAP measure. You can find our earnings press release on our website once again at www.boulderbrands.com.

With that I’ll turn the call over to Steve.

Steve Hughes - Chairman and Chief Executive Officer

Thank you, Carole, and good morning everyone. Let me provide you the agenda for our call. This morning I will be providing highlights from our fourth quarter results as well as some specifics of our retail and consumer activity in the quarter. Chris will then review the fourth quarter financial results and provide some detail on our improved 2013 financial outlook.

I’ll then close the call with a review and we look forward to in 2013 and then take the questions. With that moving on to the fourth quarter results. Overall we are extremely pleased with the fourth quarter results, revenue increased over 34% to $113 million, cash operating income grew 63% to $18 million. We entered 2013 well-positioned to grow revenue, operating cash flows and earnings.

Let me review the fourth quarter by highlighting some of our key strategies and accomplishments by segment, one Natural and Smart Balance. First on Natural segment, each of our brands, Udi's, Glutino and Earth Balance had very strong quarters. For our Gluten-Free brands is clear that we are well positioned in a marketplace and are addressing the needs of the gluten-intolerant and gluten-concerned consumers.

Our strategy is to be as to, as we come the complete solution for these consumers in three different sections of the grocery stores. First is in the Center Store grocery, second is Frozen and third is in Bakery.

We experienced strong net sales for our Gluten-Free brands combined with over 64% organic net sales growth, organic net sales growth assumes we own Udi’s during the fourth quarter of 2011, just a remarkable performance. Udi’s organic net sales that grew at 67% year-over-year Glutino’s net sales grew at 62% year-over-year, growth came from distribution wins as well as continues to strengthen the overall of Gluten-Free market.

Consumption growth is also strong, Glutino’s consumption growth at 46% across all channels and Udi’s reported 60% of consumption growth. Also our hard work since acquiring Glutino is starting to payoff that focus on innovation, renovation and our top-to-top meetings with major customers are really starting to pay dividends.

Since embarking on our distribution drive Glutino has secured warehouse distribution for over 494 incremental items across all of our accounts that’s up from 300 at the end of Q3 of 2012. These new Q4 placements due to limited resets during the holidays we’re not begin to surface at retail until as we, until we move to Q1. We have increased a number of items in the conventional grocery retail one Glutino from 9, to 9.6 items up from 7.8 a year ago.

Importantly as evidenced by the strong distribution gains our consumers are committed to get in front of the Gluten-Free trend. The challenge over the next 12, 6 to 12 months would be continued to expand the space in this retail stores to ensure with these headquarter acceptances result an expanded retail distribution gains.

Adding Udi’s to our distribution drive over the past two quarters has given us tremendous credibility with our customers. We are now the clear undisputed leader in the Gluten-Free with the number one and two dedicated Gluten-Free brands now in our portfolio. Several major retailers have been in this category capped in and we expect more accounts to follow.

Since acquiring Udi’s on July, 2, we have a secured an incremental 166 warehouse accepted items that’s up from a 100 at the end of Q3 2012. At the end of the quarter Udi’s average items of retail was 6.3 in conventional grocery compared to 4 items a year ago. As with Glutino most of the Q4 warehouse acceptances will not begin to move through the retailer until Q1 also from an operational viewpoint we started our Glutino Pretzel production in the U.S in the middle of July, the project helped us increase gross margins for Glutino to over 35% a 700 basis point improvement since acquisition a Premium mark work accomplishment by the team. We believe further gross margin improvement in Glutino as possible.

Now moving on to our third Natural brand Earth Balance, Earth Balance continues to perform well with strong consumption trends of approximately 16% across to all retail channels in geographies and we really competed a natural conventional grocery Canada and club with Earth Balance.

At the end of Q4 Earth Balance launched into a new category Plant-Based Snacks, the vegan, gluten-free non-GMO line launched with their four new Earth Balance pop corn and pop items, this launch is also an exceptionally strong start but after only 8 weeks at retail we have a phased in rollout strategy at Natural begin to sell more broadly as we move into Q2 of 2013. We are very optimistic about this healthy Plant-Based Snack category.

Moving to Smart Balance segments, our strategy for the segment is to hold the line of profits despite an overall net sales a kind of 12% for the segment in the quarter which was impacted by the winding down of Best Life spreads at Smart Balance Butter Blends we were able to achieve brand profit and improvement excluding the launches Spreadable Butter. If we exclude the impact of the categories and products we strategically exiting, net sales for Smart Balance in the segment declined 7.5% actually pacing Spreads and Butter category. Profit, brand profit for the segment excluding the investment behind the launches for old butters actually grew 15%.

Looking at our focus on Premium spreads and butter with Earth Balance, Smart Balance and Spreadable Butter, the grocery consumption trends for a premium spreads in butter categories continue to outperform the overall category. Looking at the Nielsen data for the 12-week period ending December 22nd 2012 when premium spreads in butter in that period the segment actually declined 8%, our brands actually slightly outperformed declining by 7.7% on a dollar basis.

Overall our dollar share in the segment grew marginally 10 basis points to 24.1. As we mentioned last quarter we continue we see very unique phenomena in Q4 with the price of Smart Balance spreads was actually higher than butter. We expect that headwind to moderate as we move through the next several quarters as the commodity price of butter is starting to form up.

As for our Grocery business consumption decreased 5.7% in dollars during the 12-week period driven by pricing promotion in cooking oil and peanut butter. Finally on milk, mostly expected milk sales decreased 3.8% in the quarter. As mentioned in the recent calls we are focused on improving profitability on milk and how we’re going to scale back on our less profitable customers impacting net sales for the quarter as a result consumption trends declined by 15% as this moved towards profitability.

Now – with that now I’d like to turn it over to Chris. Chris?

Christine Sacco - Chief Financial Officer and Treasurer

Thanks, Steve. Good morning everyone. Turning to our financial results, fourth quarter net sales increased 34.7 % to $113 million compared to net sales at $83.9 million in the same period last year. A number of positive factors impacted our net sales. Udi’s represented $24.5 million of our net sales in the quarter. In isolation when compared to the fourth quarter of 2012 when we do not yet own Udi’s, Udi’s net sales increased 66.7% in the period.

Glutino experienced net sales growth of 62.2% for the quarter compared to the fourth quarter of 2011. Glutino was benefiting from strong same-store sales and distribution gains at retail. Finally Earth Balance continues to report strong net sales growth with 25.8% growth during the quarter. The net sales growth in our Natural segment was offset by declines in Smart Balance spreads, milk and grocery.

Organic net sales which assumes the company-owned Udi’s for the entire fourth quarter of 2011 increased 14.6% in the fourth quarter of 2012 when compared to the fourth quarter of 2011. Gross profit dollars increased 36% to $49.5 million in the fourth quarter of 2012 from 36.4 million in the last year’s quarter. Gross profit as a percentage of net sales improved 50 basis points to 43.8% in the fourth quarter compared to 43.3% in Q4 last year.

Looking at the segment results, in Q4 2012 Natural gross margin increased to 43.3% from 39.1% in the fourth quarter last year. The significant increase in gross margin reflects supply chain improvement projects for Glutino where gross margin improved 530 basis points year-over-year. These include the move of Pretzel manufacturing to the U.S. in the middle of the third quarter as well as the Laval facility consolidation project completed in the second quarter of 2012.

Smart Balance gross margin decreased to 44.4% from 45.1% in last year’s quarter. The decrease in gross margin in the quarter primarily reflects the negative mix impact from lower volume in spreads compared to last year. In addition the gross margin was impacted by trade, slotting and coupon investments towards spreadable butter launch.

Moving to brand profit by segment, brand profit is calculated as gross profit less marketing selling and royalty expense and income. For the company’s Natural segment brand profit increased to $17.9 million in the fourth quarter of 2012 from 6.3 million in last year’s quarter. Brand profit margin improved to 29.3% compared to 25.6% in last year’s quarter and we benefited from strong sales and higher gross margin as previously mentioned.

Brand profit for Smart Balance decreased to $12.1 million in the fourth quarter of 2012 from $14.6 million in the previous year’s quarter primarily due to the investment costs related to spreadable butter. Excluding these investment costs Smart Balance segment brand profit increased to $16.8 million in the quarter.

GAAP operating income increased to $11.2 million in the fourth quarter compared to $6.6 million in the fourth quarter of 2011. Excluding restructuring acquisition and integration related costs operating income increased 42.1% to $11.6 million in Q4 versus $8.1 million last year. The charges impacting operating income in the fourth quarter include restructuring acquisition and integration related costs of $400,000 in 2012 and $1.5 million in 2011. Fourth quarter 2012 operating income was impacted by higher depreciation, amortization and stock compensation by approximately $3.8 million when compared to last year’s quarter. Cash operating income increased 63.8% to $18.6 million in the fourth quarter of 2012 compared to $11.3 million in the prior year’s quarter. We assume that company-owned Udi's for both periods, organic cash operating income increased 46.9% year-over-year.

GAAP net income in Q4, 2012 was $3.7 million or $0.06 per share compared with net income of $1.6 million or $0.03 per share in 2011. Excluding the previously mentioned items, net income in Q4 was $3.6 million or $0.06 per share compared with net income of $4 million or $0.07 per share in last year’s quarter. In the fourth quarter of 2012, net income was impacted by higher interest, depreciation, amortization and stock-based compensation expense when compared to last year by approximately $4.7 million or $0.08 per share.

Let me provide some balance sheet specifics for the quarter. During the quarter, we generated $20.9 million of free cash flow and ended Q4 with $232.8 million in funded bank debt. Taking cash into account, our net funded debt at the end of the quarter was $221.3 million. Our leverage ratio as of December 31st was 3.46 times. Capital spending in the quarter was $1.8 million compared with $3.2 million in the year ago quarter.

Now moving to our full year 2013 outlook, we are raising our outlook initially provided on August 2. For 2013, we now expect net sales to be in the range of $450 million to $460 million and cash operating income to be in the range of $72 million to $77 million. Our previous outlook estimated that sales will be in the range of $440 million to $450 million and cash operating income would be in the range of $70 million to $75 million.

In addition, going forward, we’ll now report on and provide EBITDA and adjusted EBITDA outlook as we believe these metrics are more typically used by the investment community and is more representative of how we assess our performance. For 2013, we expect EBITDA to be in the range of $64 million to $69 million and adjusted EBITDA to be in the range of $72 million to $77 million. EBITDA is defined as net income before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA and adjusted for stock-based compensation, purchase accounting adjustment, restructuring, acquisition and integration-related costs and certain other items.

Let me provide more specifics regarding this outlook. Overall, we expect net sales growth in the 22% to 27% range and we expect organic net sales growth to be in the 10% to 15% range versus 2012. We expect growth to be driven by the inclusion of (rupees) on a full year basis and continued growth in our natural segment. Total net sales growth in natural is estimated to be 57% to 62%. Organic net sales growth in natural is estimated to be 25% to 30%. In addition, we now expect the Smart Balance segment to decline in the mid single digit range.

Gross profit margin for the year is still expected to be in the 42% to 44% range and strong growth in the natural segment will have a mix impact on overall gross margin. 2013 stock-based compensation expense is expected to be approximately $8 million.

Capital expenditures in 2013 are now expected to be approximately $27 million to $29 million compared to our previous outlook of $13 million. This increase primarily relates to the consolidation of five Udi's facilities into one gluten free center of excellence and the company’s efforts to automate the production of gluten free bread. We believe this new facility will be the largest most sophisticated gluten free bakery in the world. We expect this project to be completed this fall and it will allow us to keep up with the strong demand in our gluten free business as we plan to stay ahead of the growth curve.

Depreciation and amortization is estimated to be approximately $22 million. Interest expense is estimated to be $19 million reflecting a full year of increased debt principal related to interest rate and the amortization of deferred loan costs resulting from financing the Udi's acquisition. The company’s tax rate is expected to be approximately 40%.

Lastly, I want to comment generally about the quarterly rates of sales and brand profit. Overall, we expect a number of items to impact our sales and costs throughout 2013 and as a result, we expect our sales and related profits to be backend loaded. Specifically with our Natural segment, we expect sales will build throughout the year as we deliver on the distribution games we have in our pipeline and expand retail presence of our brands. From a cost perspective, we expect the associated sliding cost to be leveraged in the second half as we – as sales build.

With that, I’ll turn it back over to Steve.

Steve Hughes - Chairman and Chief Executive Officer

Thanks Chris. Let me wrap up our call. As we close 2012 and enter into 2013, there is much to look forward too. With the expected EBITDA, adjusted EBITDA for 2013 in the range of 72 million to 77 million. We are well positioned to make the appropriate investments in our brands, fund the expanded distribution and deleverage our balance sheet.

We will drive our natural growth platform Udi’s Glutino and Earth Balance, while we focus on holding on line on profits, profit contribution from our Smart Balance segment. First a brief comment on our Natural Brand segment, with the combination of Udi’s and Glutino as well as Earth Balance we offer the premier equities into the most powerful emerging growth developments in food, gluten-free and the plant-based diet, a strong hand with momentum building.

Second, let me review a bit placement products and profits as we look at 2013. On the placement front, as evidenced by the additional 660 customer warehouse accepted items achieved in 2012 for Udi's and Glutino.

The combined strength of these two brands is apparent. Our sales team is focused and we expect it over the next six to 12 months, we will continue to close warehouse distribution gaps and most importantly expand retail space, space at retail to great gluten-free sections. Ultimately we expect to focus on three distinct retail placements, the first is a six to 12 foot grocery shelf stable section, the second is a half to full door in the frozen food section, and the third is either frozen or shelf stable rack in the bakery.

In foodservice, we have distribution over 200 colleges and universities, multiple sport arenas and stadiums and restaurants and foodservice outlets. We’ll continue to drive trial and awareness of our gluten-free brands and thanks for those efforts, fans at Yankee stadium, Dodger stadium and Fenway Park to name a few will be able to enjoy a hot dog or hamburger Udi’s gluten-free batter season.

Prior to our innovation new packaging line work for us, Glutino began shipping in Q1 and should be fully apparent on the shows by the end of the second quarter. This packaging conveys a much cleaner and clearer message to gluten-free consumers about the benefits and breadth of our products.

Product innovation, in 2013 we will launch over 20 new Udi’s and Glutino items, our new product strategy will continue to build Udi’s bakery presence with tortillas and extensions of bagels, as well as an expanding – expansion of the Udi’s brand into grocery and snacks, a very exciting new dimension for the brand. We’ll continue to build on Glutino’s presence the snack and groceries. In the first quarter for example we launched a Glutino pastry item essentially a gluten-free pop tart and a line of Udi’s granola bars and tortillas.

On profits, while Glutino reported a 530 basis point improvement in gross margins in Q4, we expect continued improvement in 2013, as we experience the full benefits of moving Pretzel manufacturing to the states begin to leverage our optimally located and state-of-the-art plants in Denver and Montreal.

On this topic, we are very excited to announce this new consolidation project in Denver, which will be fully operational by the fall as Chris mentioned. This project will be some where in scope to what we did at Laval consolidation of Quebec, Glutino. That’s more significant and we’ll bring those greater efficiencies across our gluten-free operations, we’ll be consolidating essentially the five buildings of 85 – 84,000 square feet into 180,000 square foot facility, creating what we believe as Chris said the largest state-of-the-art gluten-free bakery in the world.

This facility will allow us to continue to expand and support the growth of the business, support growth two x our current sales rate and potentially greater growth to some incremental equipment investment. In addition this project gives us the option to combine Glutino and Udi’s bread and baked goods production to the same facility and thus utilizing Laval for other categories.

As we improve upon our current manufacturing process, we expect the processes, we expect to realize additional margin improvements and we see the positive return on related investments over time. These improvements will clearly differentiate us from any other gluten-free manufacturer in North America.

Third Earth Balance, we expect Earth Balance to continue a strong momentum in 2013 as the brand will benefit from its recent product introductions of culinary spreads and the new plant-based snacks, the additional gains of occurred products in conventional grocery and mass channel.

Fourth, I continue to be excited about the early success of spreadable butter, it is essential to our long-term strategy to hold the line of profits in our core spreads and grocery business. These new product enables us to source volume from butter and participate in a fastest growing segment in spreads and butter the Spreadable Butter segment and increase our market share in the overall segment of premium spreads and butter.

Finally, in 2013 we planned to address the biggest strategic issue our customers face to the dairy case, limited space in store at warehouse. Late in the second quarter of 2013 we planned to launch a Space Saver package for Earth Balance and Smart Balance. This will provide significant space efficiencies for our customers enable us to expand distribution with a wider selection of Smart Balance varieties within the same shelf space, initial customer reaction has been very positive.

Let me end the call by highlighting Boulder Brands corporate mission. Our mission is to become the leading health and wellness company, building out and acquiring natural brands that address consumer need states. Our focus is on supporting each of our brands with a robust pipeline of innovation, strong customer partnerships that faster our distribution build out and a strong consumer support programs through marketing and education to drive awareness of loyalty. Our mission is now changed the way we one product one solution at a time. Before we open it up for calls I want to remind you that we’ll be out attending the several investor events in the next several months.

Now I like to turn it over the call to the conference operator for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll take our first question from Ed Aaron with RBC Capital Markets. Please go ahead. Your line is open.

Ed Aaron - RBC Capital Markets

Thanks. Good morning everybody.

Steve Hughes

Hey Ed. Good morning.

Ed Aaron - RBC Capital Markets

So two questions to start and then a follow up if I could. So first you’ve talked about lot of new items and you secured at the headquarter level. How much more visibility do you have into kind of like the conversion rate of these wins into ACV at retail?

Steve Hughes

Ed, the – we have a major kind of number that we’re focused on is retailer yield, that basically takes items we have placed in the warehousing and then takes what we see in Nielsen and accounted for each account we index out, some accounts are as high as 90% of what’s in the warehouses on the shelf some of it is low as 30. Right now that number is averaging I think around 50% and that really is the focus this year, we have a major program in place with the cost to really drive the retail into this equation and I can assure you that it’s the number one organizational objective from our customer teams endpoint.

Ed Aaron - RBC Capital Markets

Thanks for that. And then on the Smart Balance side you took guidance down there, how much of that is the function of pressure in the spreads category versus maybe you kind of proactively managing down and rationalizing the milk business relative to our prior expectations.

Steve Hughes

I think it’s – I think it’s given the size of spreads well to the milk it’s really the spreads question. We have continue to see softness in the category and the number one issue on spreads really is over the last five years the number of items that are typical grocery, typical source gone from 52 to 45 and that’s really prompted us in the catalos especially the Space Saver packaging where I think we will begin to get broader distribution and we think that’s a quarters down part of the hold the line strategy long term but I think that the decline on the Smart Balance which -- numbers really driven by concerns that the spreads category is going to continue to be a challenge in 2013.

Ed Aaron - RBC Capital Markets

Okay. And then just lastly I know your stock sold about pretty significantly kind of going into the quarter here and I think the big part of it relates to some questions about your revenue recognition and disclosures and also maybe even your choice of auditor. And also then you could just kind of maybe just address these issues and give us your perspectives on those topics. Thanks.

Steve Hughes

Yeah, Ed thanks. I mean we don’t typically carbon our reports but the one that – that came out this week from my perspective is a vast transparent in -- transparent in self serving as they come and we obviously want to let our results speak for themselves but with that on hand we would be happy to answer specific questions and I guess Chris would you want to take the accounting part.

Christine Sacco

Yeah. So Ed, regarding how we recognize certain sales and marketing expenses in our P&L we first acquired GFA Brands back in 2007, we look for best accounting practices in the industry by researching companies that have similar profiles in terms of slotting marketing spend. So some examples of the companies we’ve looked at include PepsiCo and Mondelez which is formally Kraft. We believe our policy forms the best practice in the industry and we have consistently applied this policy since we adopted in the first quarter of 2012 excuse me 2008. The policies in accordance with GAAP specifically relates to our recognition of certain expenses for our interim periods or quarterly reporting. Our annual results are not impacted in any way from application of the policy and I’ll say that the FDC has reviewed our financial statements on more than one occasion had no comments on our revenue recognition practices or policies both of which are disclosed in our financial statements.

Specifically around our audit firm EKS&H, EKS&H is been our auditor since 2005, we’re very pleased with the level of service they provide. EKS&H is one of the top 50 public accounting firms in the U.S. they were largest firm in the Rocky Mountain region including when compared to the Big 4 firms. They service clients throughout Colorado the U.S. around the globe about 35% of their business comes from clients with international operations.

Their clients include public companies as market caps range from $4 million to $1.9 billion. And I think it’s worth noting that in January of this year the PCI will be issued a clean inspection reports for the 2011 audits performed by EKS&H and that included a review of the audit of Boulder Brands Inc. So as I say before we’re very pleased with the level of service they provide and…

Steve Hughes

Peter, I mean I think when we describe that EKS&H they’re with us from the beginning they’ve been a strong partner. They actually are the largest presence in the Rocky Mountain region larger than the Big 4 in this region and this is where our home is. So as a -- from our standpoint we are obviously very comfortable and confident with their capabilities that grow with us.

Ed Aaron - RBC Capital Markets

Thanks and congrats on those off. Thank you.

Steve Hughes

Good. Thanks Ed.

Christine Sacco

Thanks.

Operator

Thank you. Next we’ll move to Scott VanWinkle calling from Canaccord Genuity. Please go ahead. Your line is open.

Scott VanWinkle - Canaccord Genuity

Hi, nice answers to that last question. Can you give us some perspective on gluten-free kind of between grocery mass market and Natural maybe the pace of the shift towards grocery or just anything in context we obviously see it everywhere in Natural and seeing a spring up more in traditional grocery.

Steve Hughes

Yeah. I think Scott the – if I look at Natural I think natural is kind of like in the maybe the 6 or 7 penny but we’re really pleased with the fair growth we’ve seen a terrific acceleration of Glutino. We bought we acquired Glutino it was actually down in Natural we bought it was really a quite a bit of a project. We now have Glutino growing in the 30% 40% range between the key natural players. So Udi’s continues to grow very nicely there so I would say right now we’re kind of fifth or sixth inning in Natural I think we’re kind of in the first inning in grocery and conventional.

Carole Buyers

Hey, Scott this is Carole. Just to chime in on some of the latest data we tracking the natural channel all our brands Glutino, Earth Balance and Udi’s and when we look at the growth whether it’s Whole Foods or Natural what’s interesting is we’ve seen a nice pickup in our Natural brands in Natural channel so for example Whole Foods in the 12-weeks ending December 22nd on average were up 26 at Whole Foods 26% and then Natural were up 27%, obviously conventional is much stronger across those brands above 50% we’d squeeze it but what we’re excited about is with Glutino for example when we acquired them we really have to jump start their growth they’re in the low single digit and now they’re tracking Glutino alone is tracking 24% in that period.

Scott VanWinkle - Canaccord Genuity

That’s great.

Steve Hughes

I think we obviously view that these brands have to continue to grow and be vibrant in the Natural channel that’s where the greenhouse but the cross over starting to happen the thing is going to which is I think we’re starting to really get some genuine traction of food service so I think we’re pretty excited about where that business could be in next 12 months and that’s kind of complete right space versus a corporation. So I think we’re feeling very good about all channels and we don’t think that the Natural channels mature on these brands.

Scott VanWinkle - Canaccord Genuity

Great.

Carole Buyers

And just to close that point, if you think about the average items for example today Udi’s and Glutino combine have about 16 items, in the conventional channel and in the Natural channel on average those products are 75 items and so it’s more mature but it’s growing.

Scott VanWinkle - Canaccord Genuity

Great. Thanks, Carole. And then on the facility consolidation in Denver, I’d been in that facility and it’s – that surely is so relatively close to each other even though there is multiples of those, is the benefit more capacity or are there really a lot of cost between going a block down the road that type of thing?

Steve Hughes

This is really kind of the evolution of the category. When we bought Udi's, we had - they had just done some expansion so we had to build - we really when we look at the due diligence we had a 100% upside on revenue. The current capacity will support well. When you grow at 70%, 18 months you go out of capacity and right now we’re actually at three shifts, 20 hour days producing bread. So, its, we’re kind of getting – we’re kind of outgrowing the capacity step one.

Step two is as now we’ve real volume under - we’re really producing a lot of bread, we really can look to move up the food chain relative to continuous production. So, we’re going to be putting into this facility a continuous system that right now, we’ve like 60 different hubs we roll racks into. We’ll be producing on a line that does continuous proofing, continuous baking will give us significant capacity expansion.

We’ll be able to – we’ll be able to reduce our cost a bit but more importantly we think we’ll probably be able to actually increase consistency of the products. So, I think that one of the things about the gluten-free space is there are a lot of people looking at it, a lot of people are interested in it. We aren’t really the only ones that have volume and that volume allows us to leverage, leverage the next level of automation and sophistication on production.

So, that’s one thing. So, really it’s not necessary to be jogging around between four plants. We just outgrown the current footprint and we think these new plants going to be one that will support us, 2X to 3X with some additional equipment investments that 180,000 square foot footprint was going to be able to support us for several years.

Scott VanWinkle - Canaccord Genuity

Great. And then the last question if I could. Steve you gave that the kind of the aiming reference for gluten-free in natural and grocery. I’m wondering on Earth Balance, I’m wondering what we’re going to see next week on new products at Expo. But where do you, if you want to do an aiming analogy, where do you think you are and how big that product line can be as far as breadth of categories or products?

Steve Hughes

Again we’re everywhere plant based is a question of concern. I mean, we really think that Earth Balance has – we haven’t – we kind of did the Smart Balance category expansion. We did spreads, we did mayonnaise, we did peanut butter. Well, we’re just starting to learn I think next week at Expo you will be – you will be pretty impressed by these Earth Balance vegan snacks and the early movement of these was - this is looking to be our fastest starting new product launch. So, we think that Earth Balance and now you kind of follow the oil; follow the plant based can play in snacks we think we can create some very unique products there. There is no question that the natural, ancient grain, snack arena is one of the hardest categories. We think Earth Balance can play there. So, we’ve and we also think that there are other categories that we’re currently in that could be of interest. I mean, we think the sprouted breaded category is interesting, where the brand can play there. So, I think what you’ll expect to see is potentially not the pace of the number of introductions that we’re going to see under Glutino or Udi’s because we’re trying to fill up that footprint quickly. So, I think, you’re going to see us tackle a major category here on Earth Balance.

Scott VanWinkle - Canaccord Genuity

Great. Thank you very much.

Operator

Thank you. Next, we’ll move to Andrew Wolf calling from BB&T Capital Markets. Please go ahead. Your line is open.

Andrew Wolf - BB&T Capital Markets

Good morning.

Steve Hughes

Good morning.

Andrew Wolf - BB&T Capital Markets

Good morning. I wanted to start-off a follow-up to Scott’s question on the new plant and I think you explained the strategic rational quite well. But on execution the company since entering gluten-free has put on its hard hat and become a manufacturing based company on that side versus the virtual company that’s fine I think strategically its good idea. On the execution side, can you just talk a little about the management there? Did the management talent necessary to be good manufacturer come with both brands or have to reach outside the company?

Steve Hughes

I mean, we’re really – we’re really quite fortunate. I mean, we’ll have about 265 of our – of all business produced internally but obviously our most - one of our most strategically important categories like bread. Glutino came with some very strong operational executives, who had done a great job on the (indiscernible) consolidation. They are actually going to assist in the Denver consolidation. Rick Stoecklein who is the VP of Ops at Udi’s has done a remarkable job keeping pace and working on that business. So, I think, we have some very good kind of close to the ground expertise there and then Chris Apple who is our Senior VP of Internal Operations who is actually the VP of Internal Operations for Silk he has been in Bruegger's Bagels. So we have some – with so I mean Chris really was there when Silk went from like $50 million to $400 million and ran operations for him. So we've for some pretty good expertise there I mean Peter Dray and his team has had more of a co-pact or kind of skill set but we actually have between the acquisitions and having – with the talent we have from this acquisitions and Chris Apple I think we've got a terrific team and we’re very bullish I mean they’re very fired up I mean its the opportunity that we like put together condensate our facility and that's kind of an – an operations teams dream come true.

Andrew Wolf - BB&T Capital Markets

Thank you. Turning to the retail yields strategy for this year does that kind of simply stated mean a big chain lets say may have just taken it in certain regions and your job is to get it into all the regions?

Steve Hughes

Well there that's some of it but most of this, most resets in the food industry or I guess categories are established so they’re on a kind of a schedule and they make their decisions and the space items are just continued and new items go in and off you go to the other space but here the challenge here is we’re creating the space for the first time. So we know that Safeway wants to put eight to 12 foot sections in every store but they’d got to go find eight to 12 feet in every store. So in April they’re going to add the first 150 stores and its kind of going store by so it’s a – this is kind of the pioneering challenge of this category that we’re creating kind of the space there for example now once we have that space new products will the yields will go up and it will be a much tighter model.

So some customers are its all over the board we have some customers like (indiscernible) that has got 90% retail yield (indiscernible) has 90%, 80% retail yield we have some others that have like 30% retail yield. And the nice thing is we have the tools to be dialed in literally by customer literally by store with the database at a cost has and we’re, we’re working to find more skills on this but that's one I always want to be a bit cautious about – we’re going to have some quarters where our revenue is going to be above our consumption and in some quarters where our consumption are going to be above our revenue and this is going to be a little lumpy as we get the retail flip print set universally and that's going to be a 12 to 18 month project but I think we’re going to make a lot of progress in 2013.

Andrew Wolf - BB&T Capital Markets

That really helps me understand it. Could you elaborate on that one with the follow up in that on you’ve been to lot of other growth categories quite a well going way back – so obviously retailers are going to execute it like you just said a different capabilities being able to find room to get into high category or strong category. Its just something where there is a tipping point and even sort of retailers that just are slow footed for whatever reason at some point they just get rid of some they’re sort of a top down to manners just give us a little sense of does it kind of reached tipping point where all of a sudden all of the retailers realized we got to be here and the command goes out and the execution happens or is it really just kind of more just incremental store by store, district by district, region by region?

Steve Hughes

Well the difference on this one Andy from my past experiences typically I was going into existing category so the space is already there. So this is a different line of complexity. I think the key here is to get the big five right and that's where our focus is because what’s the big five where right everybody stands up and pays attention and I think by the end of this year we will be there with Wal-Mart we will be there with Kroger the super regionals we hope to be there. We are obviously already there in home foods.

So again I think we’re going to make really strong progress this year. I mean one thing that we feel pretty confident is that we’re going to have not one but essentially two placements at Wal Mart in over 2800 stores. We’re going to have the four, eight and 12 foot grocery section but we've recently got a word that Wal Mart is going to take four goodies items and 2800 stores in the bakery department that will happen in the second quarter.

So it’s happening and again to your point there is a, there is a, I would say 2012 was an awareness building year for the retailers. Hey this is the big deal you got the get in front of it. They’re all making everyone is making moves in that direction some faster than others I think we get a couple of the majors that really get all the way to bright in 2013 I think then you’re going to have maybe a little bit of a Gold Rush, Gold Rush relative to dairy well is catching up but that could be at 2014. So again I think we’re going to make really good progress this year on number of items at retail but it’s going to be fop store by store account by account and Ken Messick and his team are really dialed in very tightly they know what their retail yield is by customer they know where they need to be by year end the cost is aligned with this so it’s going to be a lot of heavy lifting but I think the nice thing is we’re the only one that retailers can talk too. We’re the only player who has got the scale and the sophistication I’ll talk to. So we’re getting category captain appointments at the major customer so this category is going to be one that I think we’ll have some nice competitive installation as we move forward.

Andrew Wolf - BB&T Capital Markets

Last question if I could for Chris on the adjusted EBITDA guidance which frankly looks very conservative until you mentioned the slotting fees. So the way I look at it those must be the slotting fees must be fairly significant if you are just going to hit the guidance range you set. And – and also that’s number one I want to get a sense of the significant slotting fees. And two have you had any does this quarter also contains some big slotting fees there is more coming next year on more new product introductions.

Christine Sacco

Yeah I would say relative to this quarter again in terms of how we account for our slotting fees I would say the impact of this quarter was not significant relation to other quarters. Slotting for 2013 agreed there is going to be we’re going to have distribution gains we’re anticipating in natural as we said…

Andrew Wolf - BB&T Capital Markets

Yeah.

Christine Sacco

But this Space Saver packaging we’re anticipating distribution gains as well there as well and so…

Steve Hughes

Yeah. I mean one of the keys is we’re going to probably see a three or four extra up in slotting total.

Christine Sacco

Yeah.

Steve Hughes

Because we did everything material on Udi’s last year that’s obviously going to be a big promise.

Christine Sacco

Yeah.

Steve Hughes

One of the keys here is one of the categories we’re targeting is pretty expensive space it’s the frozen pizza section, we are really excited about Udi’s pizza, Udi’s pizza on a velocity for point basis is also terrific start. So we have some – we have some products when we were going last year and went into the grocery category the slotting hit this fairly nominal and we think that’s kind of be consistent but when we start thinking about going okay we want to get the 56% ECB on Udi’s pizza by year end that’s expensive space for getting this three or four items. So we’re going to be dialing that in as we get more pizza by customers but we expect to see a place that we can step up this year in slotting.

Andrew Wolf - BB&T Capital Markets

Thank you.

Operator

Thank you. Next we’ll move to Jon Anderson calling from William Blair. Please go ahead. Your line is open.

Jon Anderson - William Blair

Hey good morning everybody.

Christine Sacco

Hey Jon.

Steve Hughes

Hi, Jon.

Jon Anderson - William Blair

Thanks for the historical disclosure on Udi’s and Glutino that’s helpful in the press release. I guess I had a bigger picture question on glutin-free brands and the glutin-free space to begin. We – in your discussions with the major food retailers what is the response been to the idea of dedicated glutin-free brands in the right solution to attract that consumer versus others who maybe kind of slabbing glutin-free free on existing products or brand in certain categories.

Steve Hughes

Yeah. We actually did a pretty expensive piece of research Jon we talked about we talk to the consumer yeah before we start talking to customers I want to fair out exactly what consumers really looking expecting. The glutin-free consumer doesn’t trust brands and always having glutin-free does not in trust brands to be an isolated sections when these consumers contributing those hard core really don’t trust buying a baking mix its glutin-free on the shelf next door glutin-full baking mix product because those products are not hermetically sealed and plate breads familiar which contribute a reaction is not that much.

So we’ve done some really nice research to help the retailers and I think we convinced them I mean we had one retailer who is integrates everything organic everything where they were going to integrate glutin-free they did a 180 and they are going to do dedicated sections that doesn’t mean that there is not going to be a two tier strategy you’re going to have the brands like Udi’s Glutino that always we’re always will be. And then you’re going to have great brands like Pillsbury baking mixes are going to do the glutin-free baking mixes and I think that’s going to be kind of have this evolve so I think you’re going to have a two tiered model we feel comfortable that we can be the strategic leader in the captain space but we do expect other categories to I mean here in the – if you’re in a glutin-full category right now and you’re going to be had to think along how do I flank myself.

The one number I think I said last time in the call last call which continues to blow me away is over the last five years bread in the U.S. loaf bread sales in the U.S. were down at 11%. Bread made from wheat is gone from 80% to 69% in the mix. So what’s happened is the consumers are already moved I mean what they’re doing is avoiding and declining consumption what’s really lacking or the real broad based solutions for the fielders need. So I think that I know there is a lot of discussion about that trend by trend will I hope all of our competition kind of spend on (indiscernible) I think it’s bad because this where the fundamental food trends I have to see in my career and I think we’re really at stage one because the consumers much more engaged much more is already changed their purchase habits but is not really existing for them is really high quality broadly available alternatives.

Jon Anderson - William Blair

Thanks, that’s helpful. I may have missed this but what’s the Space Saver package that you talked about.

Steve Hughes

Space Saver package is pretty ingenious move if you think about the dairy case you have material categories material declining categories butter, spreads, green cheese salad cream. And you have the (indiscernible) categories, Yogurt, Greek Yogurt etcetera, etcetera. The challenge for the retailer is their space is fixed they can’t add another 20 feet of frozen refrigerator place they can have more they can more warehousing than these they had in store space. So working with the number of leading retailers we are going to be the fullest major brand to go from round to rectangle now my high school geometry wasn’t really that great when Jon backed away this out the idea for this project it basically you can get it’s a basically in a four foot section you could increase the pack yard by 50% and the spacings by two.

So essentially we’re working at retailers and they love it. I think this is all part of how do we get the optimal we still have – we have some working on Smart Balance distribution we don’t have the top five items is broad distributions as maybe I can’t lead those. So the plan here is to go in and really optimize our mix of Smart Balance expand Earth Balance expand Spreadable Butter we’re launching 15 ounces Spreadable Butter the retailers will love it because we’re the first major brand who is doing it and they see this is their only solution to freeing up space so they ultimately if you get the entire spreads category to go Space Saver packaging gets our cream to go get cream cheese to go get everything around to go square. They could essentially add 30 to 40 feet of dairy cases in the stores so we’re – it’s one of the things go certainly in the scheme of a food store glutin-free is a top 10 need to be addressed issue but probably above glutinm-free is I need more space because we’re making money on these categories that were squeezing space and one of the reasons why spreads is declining is the chicken out of the egg I mean the space is coming down the volumes coming down so we’re going to be basically in the same space we now be able to fundamentally broaden our reach and I think it’s gaining great points and we’re getting great support from the retailers.

Jon Anderson - William Blair

I think it’s growing in investment mode on milk what should we expect there in 2013 and 14.

Steve Hughes

Yeah, Jon it’s a good question. We clearly with all the growth opportunities we have that are – the nice thing about the Udi’s Glutino and Earth Balance business they make money let it grow and that’s one of attractiveness attracted parts about the natural brands. I think on milk one or two things is going to – will happen we’re going to be profitable we’re going to be breakeven or better in 2014, one is we bring the footprint down to those markets we are profitable today which would be able to – which is certainly an option in our control. The other is we are – we’ve engaged in several strategic discussions with the partners who have major infrastructure in dairy I mean the biggest issue we’ve had on this is we didn’t get the scale up fast in our to really get in the multiple plans and this is a category were scale has came and we think that crossly some of these partners regional dairies or national partners really could do – could do Smart Balance in over $3 or $4 case less than we can. So we’re actively engaged in those discussions but I think from a planning standpoint one way or other we’re going to be breakeven or better in 2014 we just have too many other strategic closing profitable opportunities to lean into be continuing invest in milk if – so that’s kind of our current thinking, we should have more news on that as we go through the year.

Jon Anderson - William Blair

That makes a lot of sense. One more if I could, just in light of the Udi’s consolidation project and the higher CapEx maybe Chris you could comment on the cash flow outlook for the year and if you made any changes to your target for the leverage ratio by year end?

Christine Sacco

Yeah, so on the CapEx basis I think we are targeting for year end again we ended this year at 3.5 times. So, I think we are targeting 2013 at closer to three times even with the capital expense with the new guidance that we put out there we’re going to generate $15 million to $20 million of free cash flow in 2013. I think we’re going to continue to fund our innovation in our growth; we’re obviously make investments behind our capacity as well as certain investment projects that we’ve gotten great ROIs on as you can see through Glutino’s margins and obviously continue to pay down our debt in 2013.

Jon Anderson - William Blair

Great. Congratulations on a nice quarter. I think I was also named in that report you mentioned earlier so I’m happy to be an ardent supporter this morning.

Christine Sacco

Thanks, Jon.

Steve Hughes

Yeah, Jon it’s - its - it was an educational 48 hours.

Operator

Thank you. We will take our next question from Bill Chappell calling from SunTrust. Please go ahead. Your line is open.

Bill Chappell - SunTrust

Good morning.

Steve Hughes

Good morning.

Christine Sacco

Good morning.

Bill Chappell - SunTrust

Can you just going back to Smart Balance and truly understand the - it sounds like the benefits of space saver, but if we are looking kind of third quarter versus fourth quarter trends they deteriorate a little bit further in both from the rationalization impact and the core business. So, I’m just trying to understand as we look out in 2013 I mean is this we should start to slowly build backup I mean what gives you confidence even in kind of mid single digit decline and when do you think we kind of start to see this stabilization with the new product launches and what have you, is it mid year or is it sooner?

Steve Hughes

Yeah, its going to be the turn here, we’re going to start shipping space saver package to a lead customer in the second quarter but mostly in the third quarter. And I think we’ll see this probably see a trend similar to what we’ve seen for the first two quarters, I think from up in the third quarter and turn in the fourth.

Christine Sacco

Yeah, it’s worth just mentioning Bill sequentially this Smart Balance segment and profitability is actually up quarter-over-quarter, milk is down but spreads is up. So, but as put in total as a segment this segment is up sequentially on both sales and profit.

Bill Chappell - SunTrust

And I guess with that I mean how important is it for butter prices to stabilize or move higher to kind of get where you would need to go?

Steve Hughes

Well I think I don’t think, I think really what we have potential for it is a fundamental step-change in our product availability footprint. We think that between Smart Balance spread, Spreadable Butter and Earth Balance we have potential, we are just not presenting those to have - to have a pretty significant increase in the footprint on distribution. And I think that’s really kind of the - one of the cornerstones we look at strategically how do you hold the line not over one or two quarters but over three to five years. We think this is a really smart move and I’m pretty - the whole organization I think additionally the sales team is geared up about the space saver package product – project as they are as gluten-free and I think it’s going to be something that we told are going to respond well too. So, we can’t control butter prices, we can see what’s happened in the category relative to the space pressure on the category and I think it is a pretty indigenous way to address it.

Bill Chappell - SunTrust

Okay. And then just in terms of the natural business and talking about kind of back half weighted profits, I would think that as we move especially in the second quarter some of the shelf-space schemes really show up with a new planograms and you get benefits from distribution there or is it different is it just kind of blended in as we move throughout the year.

Steve Hughes

I mean I think you’re going to see us make steady progress each quarter but its - if it’s in the spreads category where you have annual, you have established categories in annual resets, you typically get to a big step-changes or moves in distribution in March and September when they’re really the two reset ones for most customers. Here its really a bit, its - every customer is different, but I think you’re going to see us make solid progress each quarter and its not going to be like going up three items in a quarter, but I think every quarter you’re going to see us go up between Udi’s and Glutino, we’ll go up I think one to two items a quarter for really kind of the foreseeable future, but its really given the fact that in many of these cases we have the project of carving out the space, its really hard to predict any kind of big windfall quarter I think its going to be more incremental – one item, one and a half items a quarter.

Bill Chappell - SunTrust

Okay and then just last and since you’re willing to kind at least hear out everything on the call I just do you mind walking us back through 18 months ago with the Board changes and management changes and just kind of at least your side is that seem to be more it would be helpful to have some color on clarity on that whole issue?

Steve Hughes

Yeah I mean I think the, we addressed it at the time we had three Board members who had been with us from the start they were up for reelection. The Board is, majority of the Board decided it was time to get some fresh energy to the Board and they did not stand in reelection they Dean Hollis and Tom McInerney have been extraordinarily impactful and Board members since they’ve come one. The one thing to note though is the departures came in the fall of 2011. The Glutino acquisition decision was made and that vote was in the summer and it was unanimous vote they were all enthusiastic for the acquisition. So as anything organizations grow and change and we feel great about our current Board makeup and I think certainly they were relatively Glutino and I think is its all improving up by performance but they were very supportive of Glutino acquisition.

Bill Chappell - SunTrust

Okay. Thanks for the color.

Operator

Thank you. Next we’ll move to Amit Sharma calling from BMO Capital Markets. Please go ahead your line is open.

Amit Sharma – BMO Capital Markets

Hi good morning everyone.

Christine Sacco

Good morning.

Amit Sharma – BMO Capital Markets

Steve you mentioned food services and opportunity going forward can you frame that opportunity for us and what is the timeline on that?

Steve Hughes

Yes we had, the nice thing we bought – we bought Udi’s they had already invested in about of kind of a grass fruits and sales team of about 10 people and last year I think the revenue was like $4 million it was, it gives food services a lot of we got to plant a lot of seeds and wire them before it comes the fruition. I think that business we’re not trying to its not like the grocery industry where you have really tight data to project each stories, each opportunity but I think that that's an opportunity that again we don’t really we’re even pretty conservative view of it baked into our guidance we don’t want to, but we’re starting to see some nice acceleration. I think the areas of interest are going to be hotdog and hamburger buns. We have not the top of the tier but we have some regional burger chains that are looking hard and making a move there.

Pizza particularly pizza crust and some in some instances we think that we have evidenced that pizza shops that offer gluten-free pizzas that can be as much as 5% of the mix but that's going to start regionally and we’re working that. So those are kind of the two, two kind of big and there could be some big bangs there two or three years from now.

I think this is going to take a while it will happen. I think that the food service operators are about two or three years behind the grocery operators in this regard. We’re pleased with the visibility – there is something very interesting though there was a law suite with Eastern University was sued because they weren’t providing gluten-free products and the law suite and that's kind of send a shock wave to colleges and universities and our phones have been waiting up.

So we have that and we have some, the other thing that's kind of wild is you’ll give as we proud but granola has gotten to be a very hot category we two years ago we $6 million of granola now we’re doing $12 we’re actually doing some industrial work on granola as well because people like your bond you’re going into a flip kind of product into some other products like that. So I think that right now we’re being conservative, we’re kind of calling a doubling of that business this year but that could be and it’s a good margin business we have dark fruits involved berry is our broker so we have it all set up and we’re just kind of letting the watering the plants and seeing how fast they grow.

Amit Sharma – BMO Capital Markets

Got it. And then if we look at your sales guidance for the natural segment for next year organic growth or 25% to 30% versus in this quarter we did organic growth in the 60s right…

Steve Hughes

Yeah

Amit Sharma – BMO Capital Markets

For Udi’s and Glutino. So what’s - I mean – we’re hearing consumption growth is strong we’re hearing for the sizable distribution gains we’re looking at pretty good innovation pipeline so can you help us go from 60s to 25%, 30%?

Steve Hughes

I think it’s a little bit of and we’re going up against some very significant comps these businesses are ramping so at some point when you’re comping 16% or 17% growth from a guidance standpoint you want to be cautious and improving on that. So I hope that we continue to the rank run at 70% - 60%, 70% as obviously we love to see that happen but I think relative to the kind of comps we have coming in the second and third quarter we think the guidance we have is at this point the right guidance.

Amit Sharma - BMO Capital Markets

Got it and then one final one from me. And you also talked about having substantially higher slotting fee now given the strong consumption growth and given how strongly consumer feels about this category would you expect these slotting fee have been to moderate or is that something as long as we are gaining new shelve space despite its going to continue.

Steve Hughes

Well we were very efficient last year with our slotting in the crossover and going to the grocery. And we think we’re going to be pretty effective in keeping that down relative to getting product set in the grocery section. The further section is the top section, that's the section where that space scares and where people lined up down the – out in the hall and down the street to bring the new product.

So it’s a little less it’s a little less holistic about certainly the gluten-free need. We think getting we think – so that's really where a lot of that slotting increase would be driven from. And we’re going to be doing that every month because we had a great track record being very efficient last year we’re we think we’ll be able to do that in grocery and in the bakery section but if we can really drive significant distribution on the pizza and in some cases Udi’s bread and the frozen category. And fortunately that's going to be pricy because that's just the nature of that departmental store.

Amit Sharma - BMO Capital Markets

And the people that are lining up in the frozen are those other gluten-free competitors or they are?

Steve Hughes

No, no it’s just I mean its frozen is just got there is always a lot – there is a 50 pounds trying to get into a five pound sack so. We don’t really see we’re obviously watching the landscape carefully and there are some interesting new projects there we don’t really see anybody in a scale yet that's in the gluten-free discussion with us top of the customers.

Amit Sharma - BMO Capital Markets

Alright. Thank you very much.

Operator

Thank you. And next we’ll move to Akshay Jagdale calling from KeyBanc Capital Markets. Please go ahead.

Akshay Jagdale - KeyBanc Capital Markets

Good morning thanks for taking my question. My first question is just on the guidance I wanted to understand it a little bit better. It looks like your EBITDA operating income guidance is lower than before and so can you explain that what I am seeing is you increased your sales guidance you increased your gross profit dollar guidance but your operating adjusted operating income guidance came down – I mean the slotting issue is between gross and net sales that would impact sales growth more so then the SG&A. So what’s going on there first of all in mind sending it correctly and if so what are you investing in there that will be great?

Christine Sacco

Yeah I would say from a G&A perspective we've talked about increase G&A we've got some investments we’re making behind CapEx. If you look at our run rate also behind G&A for the year is obviously higher as we ramped up if you looked at the Q4 run rate that's obviously baked into our 2013 as well. I think though as we you mentioned G&A and I think as we look to 2013 we’ll start to see some leverage on G&A certainly cash G&A as we move through the year we've talked about that in the past 100, 150 basis point somewhere in that range other than the slotting some of the items we talked about.

Akshay Jagdale - KeyBanc Capital Markets

Yeah just to follow up on that so the D&A as far as I know you’re not reporting clean COG. So the D&A would be a gross profit issue and so with the slotting per say. So, I mean when I look at your guidance you actually raised your gross profit dollar guidance. So, I am just looking at marketing, selling and G&A in dollar terms looks like you’re now budgeting a higher amount…

Christine Sacco

I will take this two ways I guess on a reported basis obviously we’re going to have Udi’s marketing expenses relative the percent of sales obviously is a lot higher than something of a Glutino historically. So, I think on a full year basis you’re going to see the effects of that. The depreciation and amortization point is really relative to things that are falling into G&A such as the purchase accounting that gets stuffed up for Udi’s a clear impact of the identified intangibles that are being amortized there which we’re quite significant and Glutino front as well obviously that’s baked into the 12 numbers. We’ve not anticipate however any other individual any individual categories really I would say obviously in dollars as a in isolation you’re going to see some setup but as a percent you should start seeing leverage on things like marketing and G&A.

Akshay Jagdale - KeyBanc Capital Markets

Okay. And just on the brand profit can you help us a little bit directionally there I mean your guidance is very helpful I’m thorough overall but can you with the new disclosure which is also – but can you just give us some sense of brand profit growth if that’s possible well is to G&A.

Christine Sacco

I think you’re going to see a lot of brand profit growth in Naturals. In Smart Balance obviously we’ve talked about our investment now behind the Space Saver packaging and our desire to hold the line there on profits. So I think if you take them separately our objective again with brand profit is going to be to manage that year-over-year for on a long term basis somewhere near 2012 number.

Steve Hughes

I mean again on brand profits again taking that Spreadable Butter we have 15% on Smart Balance last quarter it’s not going to be plus it’s going to be plus or minus each quarter but our objective is have a strategy that we think with high confidence we can hold the line on profits over three to five year period and that’s us one of the reason I think Space Saver packages are right strategic move for us.

Akshay Jagdale - KeyBanc Capital Markets

Can I just Steve couple for you some strategic questions the first one is regarding space and you obviously have a vision for the glutin-free category overall that’s very bullish and you talked I think what was very helpful is that you talked about space in frozen and how you have to go and get that. Can you just talk more broadly like longer term three four five years out if your vision actually happens out there in the marketplace always so where will we see the space coming out of the more so we’ll be what categories are likely to lose space as a result of this I mean you mentioned bread.

Steve Hughes

Yeah, well that’s kind of all over the map I mean one account we’re kind of back there with juice section in their shelf with juice section and that one is cutting back to a bulk I mean I’ll..

Christine Sacco

And frozen.

Steve Hughes

Yeah. And in frozen, frozen it’s really kind of shoot want into a very tight category where spaces at a premium. But I think that if you look at really where we are and I think one of these people I really don’t – I look at this in the context of the brands we had and what the potential is. Right now Udi’s and Glutino have about 1.2% household penetration and that’s defined by buying one product consumer buying one product. These are broad line so we believe we were going to grow this businesses over the next three to five years can we take that 1.2% household penetration to two to three and we’re going to buy two items or three items versus one item.

So the power of small numbers here is enormous. And the beautiful thing is we just doesn’t research the overlap of people that are buying Glutino and the consumers who are buying Udi’s is only 22%. So there is an opportunity to cross-sell on Udi’s customer Glutino Pretzel’s on a Glutino customer Udi’s pizza type of things. So I think we have on a fairly small base how consumer is created a business this year that was again in the fourth quarter full year probably $160 million business on a fairly narrow set of consumers. The other thing is our social marketing model is we have a million friends of Udi’s and about 300,000 friends of Glutino.

We’re actually talking to like 1.3 million households which might be everybody who is actually buying our product. We know that when Udi’s for example the millions friends of Udi’s made by Udi’s half of them buy Udi’s every week. So we have almost a direct link to these consumers. I’m pretty bullish that we can double or triple the household penetration in these brands over three to five years and that we can get them to buy multiple products up Udi’s and maybe even cross-sell Glutino products. So I think there is just a lot of white space here I’m not – and there is any quite I like it and I’m not I think the whole organization is very, very bullish and I believe to build both these brands on a sustained basis.

Akshay Jagdale - KeyBanc Capital Markets

Just one last one relative to your – so before you bought these brands in the glutin-free side obviously I thought that the company has the core competency as being marketing right and you are not on the manufacturing set at all. And you have had some issues there right obviously with the milk comments it looks like you are even thinking of perhaps divesting that business you could down the road. But it feels like the core competency now is more so on the manufacturing side and you are spending some CapEx there as well. I mean, can you help me understand sort of the risk profile from your perspective how it’s changed for the company and more importantly like what learning’s have you had from let’s say milk. I mean, you have been at that for years now and it’s not profitable. So, can you, I mean are you going to (inaudible) or how should I think of that?

Steve Hughes

I think bottom line is not every new product; new launch meets your expectations. I mean, Wayne Gretzky said you miss 100% of the shots you don’t take. We have made some very smart calls and we’ve made some things that haven’t worked quite well and that’s the nature of the food business. 26% of our business is manufactured. We have a core set of very experienced and accomplished people who are running that, that are deep experience there.

I mean, bottom line is we’re a health-and-wellness innovation company that’s going to take natural brands, nurture them and natural (indiscernible) I think that’s a pretty unique skill set that we’re going to demonstrate. I think very strong capabilities and we have already the turnaround on Glutino is impressive as anything I have seen not only in terms of revenue and growth in the marketplace but also at the - when the cost goes to the line I think you should - I think that investor should stay confident and that skill set is going to be applied to other future categories and future acquisitions.

Akshay Jagdale - KeyBanc Capital Markets

Yeah. I’ll leave at that. Thanks a lot.

Operator

Thank you. And we have no further questions.

Steve Hughes - Chairman and Chief Executive Officer

Great, okay. Well, thank you very much. I appreciate everybody’s time. Have a great day.

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