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Boulder Brands (NASDAQ:BDBD)

Q3 2013 Earnings Call

November 07, 2013 9:30 am ET

Executives

Carole Paula Buyers - Senior Vice President of Investor Relations & Business Development

Stephen B. Hughes - Founder, Executive Chairman and Chief Executive Officer

Christine Sacco - Chief Financial Officer, Executive Vice President and Treasurer

James B. Leighton - Chief Operating Officer, Director and Member of Finance Committee

Analysts

Jon Andersen - William Blair & Company L.L.C., Research Division

Scott Van Winkle - Canaccord Genuity, Research Division

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Andrew P. Wolf - BB&T Capital Markets, Research Division

Operator

Good morning. My name is Grant. I'll be your conference operator today. It's November 7, and I welcome you to Boulder Brands' 2013 Third Quarter Conference Call and Audio Webcast. This call is being recorded for playback purposes and will be available beginning 2 hours after the conclusion of today's call. The playback will be available through November 21, 2013. The number for the replay is (888) 286-8010. You may also listen to the broadcast by logging onto www.boulderbrands.com and in the Investor Center, clicking on the link. [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 provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from what is expressed in these forward-looking statements for a number of reasons, including those risks and uncertainties disclosed in the company’s filings with the SEC and its earnings release.

Now I’d like to turn the call over to Ms. Carole Buyers, Boulder Brands’ Senior Vice President of Investor Relations and Business Development. Please go ahead, Carole.

Carole Paula Buyers

Thank you, Grant. Good morning, everyone. With me today are Steve Hughes, our Chairman and CEO; Christine Sacco, our CFO and Treasurer; and Jim Leighton, our Chief Operating Officer.

Earlier this morning we issued our third quarter earnings release. If you have not seen the press release, it is available in the Investor Center page of our website at www.boulderbrands.com.

The company uses the term organic net sales, brand profit, organic brand profit, net income and diluted earnings per share, excluding noncash and certain items, EBITDA and adjusted EBITDA as non-GAAP measures. The company believes these measures help explain its profitability and performance in a manner which assists potential investors and security analysts to evaluate our company. Brand profit is defined as gross profit less marketing, selling and royalty expense income. EBITDA is defined as net income before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA as adjusted for stock-based comp, purchase accounting adjustments, restructuring acquisition and integration-related costs, and certain other items. Organic measures are calculated excluding the impact of discontinued items and the licensing of Smart Balance Milk. The company believes that the exclusion of both noncash and certain items helps to provide a reflection of 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've 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 as well. With that, I'll turn the call over to Steve.

Stephen B. Hughes

Thank you, Carole, and good morning, everyone. Thanks for joining us. We're excited to be making this call from our new Boulder, Colorado corporate offices here on Pearl Street. We moved in just 2 weeks ago.

Let me highlight the agenda for today's call. I will first provide highlights for our third quarter results, as well as some specifics on our retail consumer activity in the quarter. Chris will then review the third quarter results and our outlook. I'll close with a review -- I'll close the call with a review of what to look forward to for the remainder of 2013 and 2014. Jim Leighton, our new Chief Operating Officer, will say a few words, and then we'll open it up for questions.

With that, onto our third quarter results. Overall, we're very pleased with our third quarter, a quarter in which we had 2 major transitions. We started up our new 185,000 square-foot gluten-free bakery, and we converted our spreads to space saver packaging. The team did an excellent job executing these 2 very complex projects simultaneously.

Our Natural segment continues to experience strong sales momentum, and our Smart Balance segment reported improved profitability. Total sales increased 17% in the quarter. Excluding items we've discontinued and the licensing of Milk, organic net sales increased 24%, and adjusted EBITDA increased 26% to $20 million -- to $20.2 million in the quarter. Note that this was the first quarter post-licensing our Milk to Byrne, for Smart Balance profit -- brand profit increased 16%, and brand profit margins were up 990 basis points compared to last year's quarter. Clear evidence our strategy to manage Smart Balance for profits is taking hold.

Let me review the third quarter by highlighting some of our key strategies and accomplishments by segment, Natural and Smart Balance, as well as provide color on our retail and consumer activities.

First, our Natural segment. Each of our brands, Udi's, Glutino and Earth Balance, had very strong quarters. Total net sales for our Natural segment increased 48% in the quarter. Total consumption of our Natural segment increased 40%. Importantly, while we are crossing our natural brands over to the conventional channel, we are also seeing very strong growth in our natural channel. For example, this quarter in SPINs, which tracks natural channel consumption, we reported 22% growth across all 3 brands this quarter.

Looking at our gluten-free brands in the third quarter, Udi's net sales grew 74% year-over-year. Glutino net sales grew 29% year-over-year. Combined, our gluten-free brands, Udi's and Glutino, increased net sales 53% in the quarter. Consumption growth across all retail channels was also strong, but lagged sales as we tore our purchased inventory in advance of October celiac awareness month. Udi's consumption growth was 49%. Glutino's consumption growth was 35%. Total consumption for gluten-free brands increased 43%.

What was particularly encouraging, we are seeing more conventional retailers embrace celiac awareness month, in some cases, with front-page best food day ads and supporting display activity. We believe this type of support will increase in the coming years.

Given the continued robust growth rates, we are experiencing some supply challenges as -- on several of our product platforms. This has resulted in near-term supply shortages. Our supply chain team is working to address these issues. Some will be addressed in the near term. Others will require some capital to address long term. While a high-class challenge, one we want to address as soon as possible so we do not disrupt our ability to supply the strong demand we are seeing across all product platforms. We've continued to gain gluten-free retail product distribution, filling in the white space in the category. In the quarter, in the U.S., our sales team has secured warehouse distribution, acceptances of 73 incremental items across all retail accounts. These gains take us to 470 incremental warehouse placements authorized year-to-date.

We are seeing tremendous customer engagement across all channels. We've also increased a number of items at conventional grocery retail for Glutino to 10.5, for the most recent 4-week period ending September. At the end of the third quarter, Udi's had 8.8 items in the conventional grocery channel. Udi's and Glutino now average 19.3 items in retail, up from 15.4 last year. We are feeling very good about reaching and potentially exceeding our goal of 20 items we set earlier this year.

Let me provide a bit more color on the growth of our gluten-free brands. We are seeing strong, consistent velocity in distribution builds across all channels. Second, in addition to retail strength in the U.S., we are seeing strong growth in Canada at both Udi's and Glutino, as well as growth in food service.

Canada is becoming a major business for us on our Natural sales segment, which we -- where we gained 400 -- while we gained 470 incremental warehouse placements in conventional retailers in the U.S. year-to-date, we've gained 338 incremental warehouse placements in Canada year-to-date. Also in Canada, we are encouraged by the early results of Glutino bagel chips and Glutino pretzels in Costco warehouse, building on the momentum from last quarter.

In food service, we continue to build relationships and are gaining momentum. We now have over 400 distributors building Udi's and Glutino and food service, and are represented in the -- we are represented in the specialty burger chains and sports stadiums with our buns, pizza shops with our crust, coffee and doughnut shops with our muffins and bagels. And finally, we are cultivating strong -- strategic partnerships with a large food service establishment, but those relationships take time to develop.

Our third natural brand, Earth Balance, continue -- continues to perform well. Net sales increased to 21%, and strong consumption trends of approximately 25% across all retail channels and geographies. Earth Balance continues to benefit from strong growth in our spreads and nut butters, as well as new products. I'll elaborate a little bit later, but Earth Balance has gained significant points distribution in conjunction with our space saver packaging launch in conventional retailers.

In conventional grocery, Earth Balance has seen a 40% increase in distribution, now averaging 2.5 items on the shelf compared to 1.8 items a year ago. And this compares to 18.2 items we have in the natural retail stores. There's still a lot of white space. Finally, Earth Balance launched into a vegan gluten-free non-GMO snack line with 4 new popcorns and puff items in Q4 of 2012, beginning to gain distribution in the grocery channel.

Moving onto premium spreads and butter strategy. The transition quarter where we are comparing the majority of retail customers from round packaging to space saver squares, we managed to maintain share with Smart Balance Spreads, Smart Balance spreadable butter and Earth Balance spreads. Let me review the Nielsen data for the last 12 weeks ending in September 28. Overall, our dollar share in this premium segment was relatively flat to 24.6%. The premium spreads and butter category industry-wide declined 5.8%. During the period, our brands, premium brands declined 5.6%, slightly outpacing the premium segment.

We are beginning to see the impact of our space saver packaging and execution of our overall strategy, having a positive impact on product distribution in the conventional grocery channel. Year-to-date versus December 2012, our average numbers of spreads, butter SKUs have increased 5%, exceeding all other category competitors. As the category retail margin -- retail space declines, we're the only major brand and manufacturer that has gained average items of SKUs this calendar year.

For our Grocery business, consumption decreased 5.9% during the 12-week period. This decrease was driven by competitive moves on pricing as commodity pricing on peanuts normalized and promotional cadence increased in cooking oil and peanut -- and the peanut butter categories.

In summary, our strategy for Smart Balance segment is to maintain strong profitability. Excluding the products we are strategically exiting, Bestlife Butter Blends and then the licensing of Milk, core Smart Balance category consumption declined 9% while net sales declined 4%. In the quarter, sales outpaced consumption. The delta on consumption is mainly a function of the transition of space saver packaging. If you recall last quarter, consumption outpaced sales at retail as customers drew down inventories in advance of the space saver packaging. In Q3, retailers rebuild inventories for new distribution related to that transition. With the transition to space saver packaging behind us, we expect consumption and net sales to come in balance in the fourth quarter.

Now with that, I will turn it over to Chris. Chris?

Christine Sacco

Thanks, Steve. Good morning, everyone. Turning to our financial results, third quarter net sales increased 17% to $118.5 million compared to net sales of $101.3 million in the same period last year. Our net sales benefited from a number of positive factors.

Udi's grew 74.1% in the quarter as the brand increased distribution and retailers increased inventory ahead of promotions planned for October's celiac awareness month. Glutino experienced net sales growth of 29.2% as the brand also benefited from strong sales and distribution in the quarter. Finally, Earth Balance continued to report strong net sales growth, with 21.1% increase during the quarter. Net sales growth in our Natural segment was partially offset by declines in Smart Balance Spreads and grocery.

Total company organic net sales, which excludes the impact from discontinued items, as well as the impact from licensing Smart Balance Milk, increased 24.3% in the third quarter of 2013 when compared to the third quarter last year. Excluding a purchase accounting adjustment related to the Udi's acquisition in 2012, gross profit dollars increased 11.8% to $48.3 million in the third quarter of 2013, from $43.2 million in last year's quarter.

Gross profit as a percentage of net sales declined 180 basis points to 40.8% in the third quarter compared to 42.6% in Q3 last year. This was a result of both the lower gross margin in our Natural segment, as well as the mix shift to Natural.

Looking at the segment results, in Q3 2013, Natural gross margin, excluding the purchase accounting adjustment, decreased to 36.8% from 40.6% in the third quarter last year. While we continue to report supply chain improvement projects for Glutino, in the quarter, we opened our new 185,000 square-foot facility in Denver, providing an increase in plant capacity for Udi's bread, resulted in incremental startup costs and a lower utilization rate. In addition, margins on Earth Balance were negatively impacted by increased costs associated with the transition to space saver packaging.

Smart Balance gross margin increased to 48.3% from 44.8% in last year's quarter. The increase in gross margin in the quarter primarily reflects the licensing of its Milk business, lower oil costs and lower slotting expenses in its Spreadable Butter business, offset primarily by increased costs associated with the move to space saver packaging.

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, excluding the purchase accounting adjustment in 2012, increased 27.2% to $17.3 million in the third quarter of 2013, from $13.6 million in last year's quarter. Brand profit margin declined to 22.3% compared to 26% in last year's quarter, and we were impacted by lower gross margin.

Brand profit for Smart Balance increased 16% to $14.7 million in the third quarter of 2013 and $12.7 million in the previous year's quarter due to higher gross margin, as previously mentioned, and lower marketing spend. Smart Balance segment brand profit margin was up 990 basis points in the quarter.

Operating income improved to $8.4 million in the third quarter compared to a loss of $500,000 in the third quarter of 2012. Operating income was impacted in the third quarter by asset write-offs related to restructuring efforts associated with Udi's exited bread equipment and facilities consolidation, as well as severance charges. These restructuring, acquisition and integration-related costs were $3.1 million in 2013, $6.6 million in the third quarter of 2012. In addition, Q3 2012 included a $1.8 million nonrecurring stock-based compensation charge. Excluding these costs, operating income increased 45.6% to $11.5 million in Q3 versus $7.9 million last year.

Other income was $600,000 in the third quarter of 2013 primarily reflects gains associated with commodity-hedging activities and currency changes in the company's Canadian subsidiary. In the third quarter of 2012, these activities resulted in the gain of $900,000.

Adjusted EBITDA increased 26.3% to $20.2 million in the third quarter of 2013 compared to $16 million in the prior year's quarter. The Q3 2013 net loss of $1.6 million or $0.03 per share compares with a net loss of $3.7 million or $0.06 per share in 2012. Excluding the previously mentioned items, net income in Q3 was $5.1 million or $0.08 per share compared with net income of $2.1 million or $0.03 per share in last year's quarter.

Now let me provide some cash flow and balance sheet highlights for the quarter. During the quarter, we generated operating cash flow of $9.6 million and invested $6.9 million in capital expenditures, resulting in free cash flow of $2.7 million. In addition, we funded an incremental $6.7 million in Boulder Brands Investment Group and acquired Level for $2.4 million. We ended Q3 with $248.1 million in net bank debt and our leverage ratio, as of September 30, was 3.2x. Capital spending in the quarter was primarily related to investments associated with the company's automated bread line and facilities consolidation at Udi's.

Moving to our full year 2013 outlook. With 1 quarter to go, we reiterated our outlook for the 2013 full year. For 2013, we continue to expect net sales to be in the range of $455 million to $460 million. EBITDA is expected to be in the range of $69 million to $71 million. Adjusted EBITDA is expected to be in the range of $77 million to $79 million. Diluted earnings per share is expected to be in the range of $0.29 to $0.31 per share.

For 2014, we are providing an initial outlook. For 2014, we expect net sales to be in the range of $515 million to $525 million. EBITDA is expected to be in the range of $79 million to $84 million. Adjusted EBITDA is expected to be in the range of $87 million to $92 million. And diluted earnings per share is expected to be in the range of $0.43 to $0.48 per share.

And with that, I'll turn it back over to Steve.

Stephen B. Hughes

Thanks, Chris. Let me reiterate our key strategies for the remainder of 2013, what to look forward to in the upcoming quarters. Our team remains focused on 4 main priorities: the first, expand gluten-free products at retail in the U.S. and Canada while launching in the Food Service Club and the Drug Channel; two, is to strategically revitalize our Spreads business while maintaining strong profitability; third, to leverage strength on Earth Balance through broader distribution and new products; fourth, invest in smaller acquisitions, Davies in the U.K. and Level Life Foods in the U.S. to create additional long-term growth platforms.

Just some additional color on each of these strategies. First, on Project Gluten Freedom, we're driving our gluten-free portfolio, gain distribution, more importantly, driving the household penetration off a relatively low base. Our target for 3 distinct retail placements is becoming a reality, and retailers are dedicating gluten-free sets in 3 areas of the store. The first is a 4- to 12-foot section in the grocery shelf stable set. The second is half the full door in the frozen food section. And the fourth -- and the third is a frozen or shelf-stable rack in bakery. We're seeing our warehouse acceptances translate into on-shelf wins and continue to see -- expect to see this throughout 2014.

As mentioned, we expect to reach our goal of an average of 20 items -- 20 gluten-free items at conventional retailers by end of the year, and continue to grow that average items into 2014. In food service, we continue to see a robust build off a relatively small base, as we gain distribution in both large and small food service formats and distributors. In Canada, we continue to see exceptional growth in our Natural segment. In alternative channels, club and drug, we are in the early stages of engagement, and these channels could potentially develop into significant businesses in 2014 and 2015.

Gaining distribution and expanding retail presence and accelerating sales velocities in gluten-free requires us to invest in capacity. In the third quarter, we started up our Florence Street gluten-free facility in Denver, Colorado. We began producing our gluten-free bread on a continuous line, and are on track to be fully operational across all lines by the end of the fall. We believe Florence Street will become one of the more sophisticated gluten-free bakeries in the world. We really look forward to hosting our first Analyst Day in 2014 and displaying this new facility in our new corporate offices.

Second, we continue to revitalize our Spreads business and focus on strong product leaders in the segment. In 2012, we exited Bestlife and Butter Blends as these categories were no longer strategic to our premium brands strategy. In addition, in 2012, we introduced spreadable butter and is now a key pillar of our premium spreads and butter strategy, along with Earth Balance and Smart Balance. This year, we addressed the biggest concern in the dairy case, which is limited space in the store and the warehouse with space saver packaging. In the third quarter, we completed our transition to squares with our remaining customers. The feedback of retailers has been encouraging as we received additional distribution gains in all 3 premium spreads products: Earth Balance, spreadable butter and Smart Balance Spreads. As of September 28 Nielsen data, our premium spreads have won average 10.9 items on the shelf. This represents a 5% increase from the end of 2012. This is really an impressive statistic, as we are the only branded competitor in the gain shelf space in 2013.

The net result, we picked up 113 incremental warehouse acceptance items on our spreads category. And as expected, the majority of those gains are on Earth Balance and Smart Balance spreadable butter.

Third, we're leveraging our strength we are seeing in the Earth Balance brand, first, through broader distribution, retail store expansion, and entry into new products and categories. As mentioned, Earth Balance has been a big beneficiary of the space saver packaging initiative. Additionally, as mentioned in my earlier remarks, Smart Balance is beginning to get traction in conventional grocery, in categories outside of core spreads, our nut butters, our culinary spreads and our snacks, and should gain additional distribution in 2014.

Finally, with respect to new products, Earth Balance is quickly becoming an important brand in a vegan's diet. This has allowed us to enter new categories where consumers are avoiding dairy. And we'll continue to launch new Earth Balance products in 2014.

Lastly, our fourth strategy, investing in our smaller acquisitions to generate some growth platforms. In the second quarter, we acquired Davies Bakery to begin the foundation of the U.K. -- Boulder Brands U.K. and the launch of the Udi's brand in the U.K. this fall. On October 7, we launched 19 items with Tesco. We are pleased with the -- to report that we're off to an encouraging start and product is quickly hitting the shelves in all stores.

In the third quarter, we acquired 80% of the GlucoBrands, owner of Level Life Foods. We believe that diabetes need state shares similarities to the gluten-free need state, where a consumer has a life-changing diagnosis or personal recognition, could immediately and forever change what they can eat. We'll leverage our need state focused infrastructure.

In Q3, we began selling 4 bars and 4 shakes in advance of the Q1 2014 shelf resets. Initial customer reaction has been encouraging, and we'll -- we will be launching a new and improved levelfoods.com in Q4. This website will give -- will provide diabetics with a comprehensive plan, complete with recipes, with a full and improved life and potentially reverse Type 2 diabetes with a low-carb, low-sugar lifestyle. These are 2 very exciting companies that have an opportunity to build -- to scale and become important growth platforms with the help of Boulder Brands' infrastructure. We expect each of them to contribute positively in 2014.

Before I turn the call to Jim Leighton, our new Chief Operating Officer, I'd like to say a few words about Jim's role. During Q3, we initiated a comprehensive strategic review to ensure we have the strategies intact, that's updated and set, and then take steps to ensure we have the people, processes and infrastructure to keep pace with our growth. It became clear during this process that we needed additional experience that had been through the rapid growth when the scale we believe is possible over the next 3 to 5 years. We're thrilled to have somebody with Jim's credentials to our management team, in a role that's a cornerstone of the future of the company. Jim's background in management, financial, P&L responsibilities, across a broad range of businesses, channels and geographies will ensure a greater operational efficiency across the organization. Ultimately, Jim will drive efficiencies, margins and help us improve our organization and processes, and ensure they keep pace with the rapid growth we anticipate. While I will continue to focus on driving consumer and customer demand, Jim's focus will be on developing, building and optimizing our teams, systems, processes and partners to fulfill demand. Jim and I worked together at Celestial, and there is no executive I know who is more devoted to an effective -- and driving continuous improvement and organizational improvement. Jim is already adding great value strategically and tactically, and I look forward to partnering with him as we work together to scale our Gluten-free business and add future growth platforms. On behalf of the board and the entire organization, I welcome Jim. Jim?

James B. Leighton

Thanks, Steve. Good morning, everyone. I'm thrilled to step into this role of Boulder Brands as a member of the Board of Directors. I've worked closely with the management team for many years, and I'm excited to partner with Steve on a platform of the scale and momentum of Boulder Brands. As a leader of the natural foods industry, the company has significant potential for growth and margin improvement, and I look forward to leveraging my 35-plus years' experience as an entrepreneur and general management, manufacturing and supply chain management to help lead the Boulder Brands team and helping achieve its mission of becoming the leader in health and wellness' companies. Steve?

Stephen B. Hughes

Sure. Thanks, Jim. With that, let's open up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is coming from the line of Jon Andersen from William Blair.

Jon Andersen - William Blair & Company L.L.C., Research Division

I wanted to ask first a little bit about the guidance for 2014. By my math, it implies kind of a mid-teen sales growth number for 2014. And I was just wondering, Steve, if you could talk a little bit more about the complexion of that growth, what you anticipate out of the Natural segment versus the Smart Balance segment. And within Natural, how you're thinking about the contribution from distribution gains relative to velocity improvements in existing doors?

Stephen B. Hughes

Jon, I'll turn it over to Chris, but at this point, this is kind of our first crack at 2014, and we're going to keep it at a pretty high level. Clearly, we're not seeing anything on trends to date that would suggest a significant change, although we're talking about the law of big numbers coming to effect next year. But we'll be much more granular on the year end call. But, Chris, do you have any comments?

Christine Sacco

Yes, Jon. I would just reiterate what Steve said. We'll be providing our segment guidance for '14 on our February call, as well as a lot of the components down to EPS.

Jon Andersen - William Blair & Company L.L.C., Research Division

Yes, I'll come back at it from maybe a third quarter perspective. I think you indicated that consumption in the quarter for the gluten-free brands was up about 43%. Can you talk a little bit about the drivers of that? How much of that maybe was velocity versus distribution?

Stephen B. Hughes

Yes, we're still seeing about this 50-50 split, and 50% velocity growth, 50% shipment growth. The bit of a wild card, as we go into next year, is we're starting to see some really nice -- we're starting to get a pretty nice scale to our food service business. I mean, it's on a run rate over $10 million, up from $4 million last year. So that is kind of a new channel, a lot of white space. We're very early on with the club initiative, but we're encouraged initially there. But we think in the core channels of foods -- of natural and conventional and the mass business at Wal-Mart, that we're seeing about 50% consumption, 50% distribution build.

Jon Andersen - William Blair & Company L.L.C., Research Division

Perfect. Question for Jim. Jim, congratulations. I was just wondering, I know it hasn't been long since you kind of moved into your new role. But if you have any thoughts on kind of what you see as the major opportunities today and what some of your priorities are, I think that would be really helpful.

James B. Leighton

Yes, thanks, Jon. Yes, first of all, as I said earlier, I'm just thrilled to be here. And I'm in week 4 and I've gained a deeper appreciation for what the Boulder Brands teams have accomplished to date and how bright the future is for all of our stakeholders. What I found so far is that we have a unique mix of entrepreneurial capabilities, tremendous group of passionate people, but what I see is under-leveraged CPG experience. Steve is our Chairman and CEO, and I've -- as Steve mentioned, we've worked together in prior lives. He's provided the leadership and the vision. But what now is needed and excites me going forward is bringing scale and efficient and effective processes to the operations found in larger CPG companies. So I've known Steve a long time, again, and I found no one better in identifying consumer trends, needs and creating demand to serve those needs. But my role, as I see it, is to help the team fulfill that demand with best-in-class quality service and cost. So I see those as huge opportunities. One example of that is, as we mentioned earlier, our Denver manufacturing facility is one of our first of many steps, as I see them, in bringing scale to the various platforms of products that we're now producing, significantly increasing availability and significantly decreasing cost of goods sold. What I will say is, as Chris mentioned earlier, as we scale up, we will have certain startup costs and so forth that we'll be sharing and baking into our numbers.

Operator

Our next question comes from Scott Van Winkle from Canaccord.

Scott Van Winkle - Canaccord Genuity, Research Division

First, an easy one. What's the -- on the reconciliation, what's the $700,000 stock-comp charge?

Christine Sacco

That is an accelerated charge that was taken -- just the acceleration, not the normal vesting, for the $16 tranche of Steve's price-vested stock options and restricted shares.

Scott Van Winkle - Canaccord Genuity, Research Division

Okay. All right. So the new facility and talking about the capacity utilization you saw in the quarter and having a little impact on the gross margin in the Natural segment, can you kind of give us how that plays out over the next 12 months as far as utilization? How much is the pressure, what's utilization versus startup costs? I'm wondering what -- should we just expect the margin to kind of trend against that new facility over the next year?

Christine Sacco

Scott, this is Chris. The impact of the startup costs to the quarter for Natural was about 75% of the 380 basis-point decline you saw year-over-year on Natural. It's 180 basis points to the consolidated results. It's -- the bread machine startup and throughput moving lines, those lines are -- some lines were moved in Q3, some will be moving in Q4. And at this point right now, which obviously is helped by growth underutilization of our facility and our equipment, I think we'll continue to see those trends in Q4. And, again, I would just stress that Jim has been here for 3 weeks, so I think going forward, there'll be more. On our February call, I think we'll have a better look at when we start to see the margin improvements come. But, obviously, it's a key focus of the company right now.

James B. Leighton

I think -- this is Jim Leighton. As a key, one of the things we have to make sure we do going forward, to make sure we do this in a very planful way as we scale up internal production to larger, more efficient production lines. So we want to make sure, and we are taking the time now, to really lay that out over the next 3 years relative to what capital investments we should or should not make and what production we should be doing internally versus externally.

Stephen B. Hughes

Yes. I think the only thing I'd add to this, I mean, first of all, overall, we're thrilled with how that transition happened. I mean, we had a quarter in which Udi's was up 73%, when we changed the plant. And so while we'll have more color in the next call, we expect those margin -- some of those are one-time costs, some of those utilization costs, we will be -- through the one-time costs and start to get the benefits of that scale. But I think, overall, we're really pretty pleased with not only that we were able to pull off that transition we did in the quarter where we had the business up 73%.

James B. Leighton

Right. And the other thing is, we, of course, need to balance our capacity utilization with demand as well as working capital. So we don't want to get too far ahead, but we need to stay far enough ahead from this wonderful demand that we're seeing.

Scott Van Winkle - Canaccord Genuity, Research Division

And the -- the Udi's growth, that 74% growth of Udi's, obviously, you gave us some numbers on growth of number of items per door in grocery. Is -- how much of that growth is new products versus the core 80-20 role with Udi's? You had a large percentage of that volume was driven off the core SKUs. Is that changing? Is the mix of revenue on product getting more broad?

Stephen B. Hughes

The -- and we're still seeing very strong growth in the core items. And, really, kind of how our model works, when the new products really start off and they kind of go in the natural channel first, kind of proof-of-concept stage. And so while we get great reads and getting to see really nice impacts of those businesses, it's on a probably small scale and we kind of prove the new products out and then begin to cross them over. So this is still largely driven by the core SKUs. We are starting to get some testing of bread into the club channel, which could be very meaningful next year, very early stages. I think we have a lot more visibility on that in the next 90 days. So it really is -- I mean, Udi's -- we have been told by retailers, when we talk to them about Udi's, they say, "Hey, bring it on." And this is one of the hottest brands. In fact, we actually just did a little review of the last 4 years. Udi's is the fastest-growing brand in the conventional grocery store channel, and the retailers get that. And they're looking for us to broaden that. But still, we think that there's still a lot of white space on the kind of the original core business, and we'll begin to flush that brand out. Our Pizza business is doing extraordinarily well. We'll be expanding that business with new items next year. But I think, really, Scott, is -- I've been -- I worked on 1 white-hot brand in the past in Healthy Choice in the early days. Udi's has all the makings of that brand proposition, and the retailers are encouraging us to be expansive in our categories. But the nice thing is the core of the business continues to grow well and, most importantly, the core of the business continues to perform very well in the more mature natural channels.

Scott Van Winkle - Canaccord Genuity, Research Division

Now, Jim, two more, if I could. In the food service commentary, you said specialty burger chains, I don't think that -- I don't know that I heard that before. Obviously, we knew about Yankee Stadium with buns and such, how do you define -- or just give me the scale of a specialty burger chain that would have your buns. And on those menus, what's going on that menu, a gluten-free alternative or an Udi's gluten-free alternative?

Stephen B. Hughes

Yes, it's still a mix. We're getting some -- on the burger chains, we're getting some category -- some bread restaurant mentions, and these could be restaurants like Red Robin, we're in tests with TGI Friday's, Smashburger, those kind of -- 300- to 400-unit kind of chains, not the really super large ones. The thing that's been very interesting, though, is we were working with a pizza chain, Donato's, in the Midwest, about 300 units. And they are actually doing a co-branded pizza, and they are actually incorporating Udi's in their main advertising. So they're actually advertising the Udi's gluten-free pizza. And they are very pleased with the results. So, again, this is a channel which I think we'll build off with a small base. But last year, we were around $4 million. This year, we'll be over $10 million. We'll probably exit the year at the $12 million run rate. A lot of conversations in the works. We're getting exclusive commitments with people like Cisco and US Foods. That -- again, that takes a long time for that to percolate up. But I think sometime in the next 12 months, we can hit a pretty compelling -- a pretty significant inflection point in the food service platform. I think we're -- it's patience and it takes time, arms and legs and a lot of one-on-one work, but I think we're making really strong progress.

Scott Van Winkle - Canaccord Genuity, Research Division

And then the last question. On the future competition in gluten-free bread, you see the regional bakeries doing more gluten-free bread. Is that coming more frozen in the future? Or are we at the point where you're starting to see more ambient temperature bread hitting in gluten-free? Obviously, I know you've had some of that experience. But I'm wondering, where do you see the new entrants coming? Are they more frozen or are they ambient?

Stephen B. Hughes

They're really ambient with preservatives, so they can extend the shelf life to 14 days, and we've been tracking them very closely, obviously. And what's interesting is while -- for instance, Goodbye Glutens had -- has been in market and it's now going to expand. In the markets where Goodbye Gluten has been selling Udi's bread is up 33% in those markets. In the markets without Goodbye Gluten, we're up 33%. I kind of liken this to a swimming pool. It's -- we're seeing on one side with their garden hose trying to fill it. You got General Mills on the other side trying to do their baking mixes and refrigerated dough, when you have now Bimbo with Goodbye Gluten. But I think the consumer demand is so underserved that it will be a long time before we begin to -- we feel that pull up and begin to interact there. Now that also goes back to the importance of brand marketing, and we continue to spend consistently against Udi's. Our Friends of Udi's continues to build -- one of the things that's been very impressive is we just got the top line on household penetration improvement, and I don't have those numbers right in front of me but we saw like a -- really from 1.4% -- 1.5% household penetration on Glutino to 2% household penetration, I think, 1% household penetration and 1.5% on Udi's. The thing that is most powerful about those numbers is we're talking about less than 2% household penetration. We think when those 2 brands, in the next 3 to 5 years, going into 5% household penetration is a real opportunity and potentially, beyond that. And I just think that there's going to be -- there's going to be a lot of competition. I think it's going to be good for everybody because the broader and more available options are, the more it's possible for people to lean into a gluten-free lifestyle. And at this point, we don't see any zero-sum activity. I mean, we think it's still trying to address what is, I think, a much -- an extraordinary consumer trend that's significantly underserved today by the products in the marketplace.

Operator

Your next question comes from Mitch Pinheiro from Imperial Capital.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

A clarification first. You said about the startup costs and the impact on gross margin, startup costs and such were 75% of the 380 basis-point decline in Natural. Is that right?

Christine Sacco

Correct.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

Okay. And what accounts for the other part of the decline?

Christine Sacco

We have some pressure on our Earth Balance margins this quarter associated with our transition to space saver packaging. We should see that come back in the fourth quarter.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

How big is the gluten-free bread market today, maybe the last 52 weeks? And what is your share of that market?

Stephen B. Hughes

I don't have those numbers right in front of me, Mitch. We have, I think, about 52% of bakery today, and we need to update that and make sure we're capturing any kind of new entrants this year. But when you look against the competitive set as it stood at the beginning of the year, I think we're about 52% share there. I think the potential here is so -- I mean, that's talking about a fraction of total bakery. I mean, we're talking .00 type of size. So that's why when I start thinking about -- and my thought process is within 5 -- 3 to 5 years, 5% to 10% of all these wheat-based categories are either going to be gluten-free or they're going to go away. There's just tremendous white space for us and any other competitors to come in. I think it's going to be -- it could very well help accelerate the total trend because what the biggest frustration consumers have right now is broadly available set of options. I mean, right now, there's like -- we're still only at 65% ACV on our top bread items. So there's a lot of white space out there for us and others to fill. So, again, we've got to be able to be on our toes and be innovative and continue to improve our products and drive our message. But we continue to add about 50,000 Friends of Udi's a month to where our -- that model where we're now around 1.5 million Friends of Udi's. That ties pretty closely to the household penetration on Udi's. So this is going to be a -- growth like this is going to attract a lot of great competition, and we've got to be on our toes.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

And how does -- I mean, how would -- it's hard to believe that the gluten-free consumer, that's probably the most voracious label-reader of any consumer out there, how are they looking at a Goodbye Gluten bread and others that are fresh with preservatives? Do you think that would be sort of almost counter to what would be desired by the gluten-free consumer and -- or is it just they're out there just trolling for the casual consumer in gluten-free? Is that what they're doing?

Stephen B. Hughes

I think they are, but I think it's -- we've decided on Udi's that we're not going to have preservatives in Udi's. We are doing the frozen and slack up program in about 25% of our business today and as our velocities grow, more and more of our products will be on the rack in the bakery section. So I think it's -- not all consumers are the same. We think we have a very unique connection with the Udi's consumer. And we have -- a part of that promise is preservative-free. And, again, when you have 1.5% household penetration, the kind of loyalty we have, we'll be -- we can have a terrific business if we get the 5% household penetration who pay, building off that promise. It doesn't mean, though -- I mean, now, total gluten-free, I just gave the numbers of 2% for Glutino, 1.5% for Udi's. Total gluten-free household penetration went from 9% to 11% in the last 12 months. So I mean, this trend is just -- I mean, again, you can have a consumer need, but are there any products to fill it if you don't have a trend. And now you're seeing the products come to market. I think we're really well positioned. But we're going to have to be on our toes and continue to innovate and continue to drive the cost down and the like. But I think they're going to be some consumers where a Goodbye Gluten is going to find it's -- find it's place. And that's probably -- maybe a consumer we wouldn't really -- we wouldn't be able to get to.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

Okay. Three more very quick questions. What -- how much did shortages affect your top line?

Stephen B. Hughes

We -- it's kind of hard to precisely call that because when you're short an item, then the retailers come back and order double. But I think it was probably $3 million, $3 million to $4 million in the quarter and it was primarily focused on Glutino. And we're all over this. But one of the problems is, we're talking about product. When you grow -- when you're growing at 30%, let's say, on Glutino, you're going to have some products that are growing 100% in that mix. And so these were a couple of our new products. One was bagel chips we've had some real challenges on, and we're -- these are not -- these are all solvable, some of which can be solved quickly. But we will probably have some shortage issues in the fourth quarter as well. But Jim and the team is all over this, and we're committed to making the right steps to create the bandwidth to support this demand. I mean, one of the challenges is we continue to surprise ourselves each quarter in terms of the growth of these businesses, and we will -- we need to have our base plan. We also need to have the plan in terms of, okay, what could happen in the upside to make sure that we make, as Jim said, the prudent decisions. You can't get 2 in front of your demand or you have unutilized capacity. So we've got a little bit of a Rubik's Cube there. But I think we'll -- we're focused on it. We're putting in a state-of-the-art demand planning system, which I think is going to have great benefit for the organization. And I expect this to be short term in nature. But there could be a couple of the product platforms that we had to put some capital in and it could take 6 months to fully get out of the woods.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

Okay. And then where are your Earth Balance snacks being distributed, to start?

Stephen B. Hughes

Well, we -- obviously, we're building those out on the natural foods channel. We have -- Wakefern has taken the products. We just got a very good news out of Kroger. They're going to be taking the snack products in December. I think that will kind of prime the pump and next year, we could see -- we might go to 30% or 40% ACV on those products next year.

Mitchell B. Pinheiro - Imperial Capital, LLC, Research Division

Great. And final question, what would be your cost of goods inflation expectation that's embedded in your '14 guidance? Any help with that?

Christine Sacco

It's about 2%.

Operator

Your next question is coming from the line of Chris Krueger from Lake Street Capital Markets.

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

Just a couple of quick questions. I know you just began to rollout Udi's in the U.K. and you've owned Davies for a couple of quarters. Any thoughts on expanding into greater Europe and other international regions, and what the strategy might be if so?

Stephen B. Hughes

Well, the strategy in the U.K. is really, let's prove the concept at first, and where -- we've got the right retail to do that with Tesco. We have -- we believe that Asda and Sainsbury will come online in early 2014. But we're going to kind of make sure that works before we can have ourselves -- we are getting inquiries from Carrefour and other retailers that are on kind of in mainland Europe, but we want to go very carefully on this and do it right. We are starting some export work. We are on the shelf on an export basis at Kohl's in Australia. That's kind of a little bit, again, proof of concept. It's not something we're going to make a lot of money on with all the export gymnastics, but we'll see how those go. And if we get bright green lights in the U.K., we could be expanding broader by the end of next year. But we really want to be very prudent on this. We've got a great team at Boulder Brands U.K. They've got great customer relationships, but we're testing 19 items. We didn't go in and test 2 items. We're just a 19-item footprint. We want to really shake that down and do that right. And I think we'll go -- I think you'll see us be fairly prudent in the sequence of -- we're going to have to see bright green lights each step of the way to take the next step.

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

Okay. Just my other question is related to your -- kind of your incubator investment fund, whatever you call it, that you announced early in the year. I don't think Level Life is part of that. But can you talk about some of the progress you've made there? How many small companies have you invested in so far? Or how's that's going?

Stephen B. Hughes

We have one of the managing partners of Boulder Brands Investment Group here, Carole?

Carole Paula Buyers

In the -- this year-to-date, we have invested -- Boulder Brands Investment Group, which is our incubator fund owned by the shareholders of Boulder Brands and partnered with Bill Weiland of Presence Marketing, we invested in Suja, which is a high-pressure, pasteurized juice company based in Southern California. It's one of the hottest brands within Whole Foods and it's -- basically, it's just close to raw as you can get, but it's high-pressure, pasteurized, rather than being heated. So it keeps the nutrients. And so this is our first step and then making a nice investment into a brand and a trend that we like, and we only take minority position, so we have a minority position within this company.

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

Okay. So that's -- it's still the first -- the only that you've invested into so far?

Carole Paula Buyers

Correct. We've probably looked at between 20 and 40 ideas to date and this is the one we...

Stephen B. Hughes

One of the challenges, as Suja is doing so well, the bar keeps moving up. So...

Christine Sacco

And we've made 2 investments year-to-date for a total of $8.8 million.

Stephen B. Hughes

Both in Suja.

Christine Sacco

Correct.

Operator

Your next question comes from Akshay Jagdale from KeyBanc Capital Markets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

I just wanted to ask about the '14 guidance. In terms of margins, actually starting with '13, did you say -- what is your gross margin guidance now for '13? You had said 42% to 44%, I think, before.

Christine Sacco

That's correct.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Are you still in that range? Or where are we going to end up there?

Christine Sacco

So we're likely to be -- it's probably towards the lower end of that range, but I think we still feel comfortable with that range.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And then for '14, can you give us at least directionally some guidance on margins? I mean, should gross margins be up? And I think EBITDA margins are going to be up slightly, right? So can you help us with the margin picture? I know you don't want to be too granular, but just directionally, up or down gross margin then...

Christine Sacco

Actually, I think, generally speaking, for '14, you're going to see a mix shift, obviously, to Natural. I think you're going to see margin improvement throughout the year with the investments that we're making. But, again, I think with 3 weeks on the job, we want to give Jim enough time to kind of dig into our '14 plan. And as he said earlier, there's a lot of room for opportunity on our margin structure. We're going to be very careful about it and make sure we have a balance between efficiencies and utilization. So I think we're going to -- we'll have more on the February call, but from a high level, I think you're going to see...

Stephen B. Hughes

And we're going to see some improvement on EBITDA margins as we get some more leverage throughout the P&L.

Christine Sacco

Yes.

Stephen B. Hughes

And one of these we continue to see as we rotate to Natural, the Natural marketing spend is -- on a percentage basis, is lower than Smart Balance, so we get some benefit there. But we also should get some leverage on the G&A line.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And just on D&A with your CapEx plans, can you give us some idea what D&A could be in '14?

Christine Sacco

D&A is set at $20 million for this year. I think you're going to see it tick up a few million dollars as we head into next year. But, again, we'll have more update on that as we understand more the timing of our CapEx investments for '14.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And then Steve, just on -- directionally again, is it fair to say that your plans on new items, as well as velocity or just your outlook hasn't really changed from 3 months ago? I mean, if it has, can you just help us understand if it's changed?

Stephen B. Hughes

No, it hasn't. It hasn't. I think one of the keys -- and, again, we're managing a portfolio on the Natural side that's growing north of 40% and, obviously, it could be comping bigger numbers. But we're seeing nothing but green lights on both velocity, all-channel customer engagement, and we have a very robust innovation pipeline. And I think we -- we've done a lot of hard work in the last 18 months trying to get the retailers to see the magnitude of the trend and how underserved it is. And I think we had kind of passed the inflection point where all the major retailers get it, and there's actually a bit of a -- they were kind of rushing to kind of address it. And in many cases, we're -- the category capped in those cases were right in the planograms. And so I think we're going to see continued build on distribution but to date, we have not seen anything on velocity and unit sales and dollar sales per point of distribution that's cooled at all. It's kind of maintaining despite the fact that business continues to scale.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So as of right now, just broader picture in grocery, have all the larger grocers in your opinion -- if I go to grocery stores, I don't see all large grocers having like a 4- or 8-foot dedicated section. I've seen some in supercenters, et cetera. But can you help us understand -- I mean, it seems like you're having these conversations, in these conversations they're committing to it, then you have to see them actually execute that in the store and over time, I think, that will continue to happen, right? So where are we in terms of those conversations? So we get a good sense they're going positively, but have all the shelves reset at the store? Or are we still like sort of halfway through there?

Stephen B. Hughes

I think we're in the very early innings of seeing this come to life at retail. Part of that's because -- I mean, a retailer like Safeway is going to go to 1,500 stores and go find 8 to 12 feet. They're committed to doing that, but that's something that's literally a store-by-store planogram-by-planogram decision. But you're seeing people -- you're seeing customers and the larger ones, most encouragingly, have made a strategic commitment. I mean, Safeway has gone really from kind of a year ago -- almost a year ago, we had a presentation with them that I kind of really put gluten-free on their horizon. I think by end of this year, though, they will take in 50 items from us and be putting -- starting to deploy 8- and 12-foot sections in most stores. Now it's going to take them 12 to 18 months to go through the logistics of figuring out where to find that space. On the other hand, Wal-mart is way out in front. Kroger is obviously -- is very well set in the store's natural sections and they're working through what to do on those stores that don't have the natural store within a store. So -- I mean, it's really, literally, they're 25,000 stores out there, and this has got to be solved. It's not like we're trying to put in 3 or 4 new SKUs into an established category. We're trying to carve out the real estate for a new category. But I think it's happening, and I think we'll see continued -- every month, you're going to see our average items tick up. You're going to see the average items for the total category tick up. Some customers, you're going to see some nice, big step changes when they hit it. But it's not like resetting a section, it's carving out a section, and that's going to take some time. But it's happening and I think we're right there in a partnership position with most of these customers, helping them figure it out. And that's why I think -- the number we keep watching is, we think the distribution build is going to continue and we obviously keep watching the velocity numbers. And right now, we're seeing green lights from both of those.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And just one last one, again, just trying to get a sense of trends. But a lot of times, the fragmentation in this category can be misconstrued as competitive, or there's some pricing pressure coming. Can you just comment on their fragmentation in terms of number of items, number of companies versus price pressure, if I may? That would be helpful. I mean, I don't see any major price pressure in the category per se from just our channel checks, but I'm...

Stephen B. Hughes

You're going to have -- I think, one to one, I think the average retailer right now has about, in the universe of the brands that we're tracking, has about 40, 45 items on the shelf. We have -- we're approaching 20. So we've got somewhere between 40% and 50% of the space, and we're seeing that reflected in our share, actually, of that consensus that's closer to 55%, 56%. We are seeing some people trying to come in with lower prices, and it baffles us how they're getting to those prices because we know the supply chain implications. But when you've got Udi`s and Glutino and some of these other brands that have been around for a while and you're coming in out of the blue, what are you going to sell? I mean, we're -- the product quality is improving on all the core brands, so there isn't really a quality play to be had. So there are -- you're going to see some people doing some price-competitive things. We haven't really seen that as anything that is having a share impact on us. We're growing share even though we have more than 50-share today against that universe. But, again, I think this gets back to -- one of the reasons why I'm thrilled to have Jim involved is we have an opportunity to move. I mean, this category right now is, by and large, early stage or batch production. I mean, it's really almost a pilot plant kind of production. Because we get scale and can start moving to continuous production. We get 2 real benefits. Clearly, more consistent quality product, better product. And secondly, we get improved economics and margins. And initially, we don't see there being pressure to reinvest that in the price and the category. We think that's a way to increase the overall economics of the business. We -- we are committed to continue to spend in a certain percent rate as we grow on marketing, but we don't necessarily see the marketing spend changing 100 basis points plus or minus going forward. We think that's adequate given our marketing model in this segment. So, again, you never want to be complacent or comfortable and we aren't. We check out every new product that comes in. We track every new product that surfaces to see whether or not that is starting to have an impact. And we're going to need to be on our toes, but I think we're in a pretty good position right now.

Operator

Your next question comes from Andrew Wolf from BB&T Capital Markets.

Andrew P. Wolf - BB&T Capital Markets, Research Division

I got in the call a bit late, but so -- hope I'm not rehashing too much. But just on the gross margin in the Natural segment, did you call out how much of that is kind of 1 quarter or transitory? And where it isn't quite transitory like capacity utilization, when you -- when that normalizes, and what kind of profit recovery you anticipate?

Christine Sacco

Andy, this is Chris. We talked about 75% or 280 of the 380 basis-point decline in Natural margins, we think are kind of startup and transition in nature. And so we'll be working through. I think we'll see some of that carry into Q4. Some of it could be maybe a little bit longer. Things related to throughput on the new bread line as we started it up this quarter, moving our lines. We moved some of the lines in Q3. We're going to continue to move some of the lines in Q4. And then as we grow, growing into our utilization off from the plant and equipment factor. And so we haven't guided on '14. I think what we were talking is Jim's been on the job for 3 weeks now, and I think it will be a thoughtful process in terms of demand and efficiency and utilization. And we'll have more on that, kind of in February.

James B. Leighton

Yes, this is Jim Leighton. I'd just like to add in -- I've been extremely impressed in the -- in my tour of duty the first 3 weeks and going to the various facilities. And it's really interesting to me having been in CPG, both large and small companies, but a lot the product that we're seeing on shelf is being produced by manufacturers that have really cobbled together lines, including us, the Glutino lines, the Udi lines that I've seen. So, really, what we're doing is being very mindful relative to bringing scale and putting those lines in a gluten-free facility, but doing it in a conventional way, meaning the much-higher throughputs. So I would anticipate next year, relative to the impact on gross margin, we're going to continue to do that on various lines, those core lines that we're really focused on.

Andrew P. Wolf - BB&T Capital Markets, Research Division

By continuing to do that, I mean, trying to transition them to like, Steve was saying, continuous or more efficient ways of producing it?

James B. Leighton

That's correct.

Stephen B. Hughes

And maybe I think the -- we're kind of at first-stage production here as is most of the category. And we just think that -- I still believe that, ultimately, Glutino and Udi's have the potential to be 45% gross margin businesses, but you need to have volume first to be able to warrant the scale up, and we're kind of hitting that tipping point on different product platforms. We're obviously there already on bread, but we're getting there on buns, we're getting there on cookies, we're getting there on granola. So those are all things we're going to tackle. So I think -- when you think about our gross -- when you think about our capital spend next year, I mean, most of it is going to be much very much ROI, fast payback kind of investments.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Also on the Earth Balance spreads, the saver packaging was mentioned in there. Is that something with a core profit of a new product? Or was that also a transitional trend?

Stephen B. Hughes

That was transition and it was a bit of -- that was just transition.

Christine Sacco

And I think you'll see that come back in the fourth quarter. That was very short term in nature.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. So moving to sales, I guess the way I see it, year-over-year and sequentially and in absolute dollars, however you look at it, looks like the Q4 kind of momentum is a little slower, and the sales momentum you're talking about for next year kind of ramps up. So I'm -- as I'm thinking about Q4 either in isolation and maybe the shape of the ramp-up and sales growth next year, could you just kind of walk us through what's in there? Is there some kind of capacity or supply constraint now? Or is there a new product development cycle or new customer development cycle that you kind of referenced as in that regard?

Christine Sacco

Yes, Andy, this is Chris. A couple of things I would say for Q4 for Natural. I think we're comping bigger numbers. In the third quarter, we saw some pull-forward for Udi's sales ahead of October's celiac awareness month, and we thought as a result, it prudent to reflect that in our Q4 outlook. And Steve mentioned in his remarks earlier, we are experiencing some supply shortages at Glutino, in particular. And so, we hope our guidance proves to be conservative, but time will tell.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. So for '14, with the growth, is that product-driven? Is it supply-driven? I mean, would you be at that same run rate, if not for...

Stephen B. Hughes

No, any supply issues we have, I think, will be resolved. So it won't have a material impact in 2014. Again, this is our first guidance. We want to see how the fourth quarter comes in before we tighten that up. And my hope is that we -- to date, what we've seen is each quarter, we tend to come in stronger than we've expected. But we want to -- when you talk about these kind of growth rates, you want to -- you got to be very careful because you don't want to put a robust growth rate on this kind of momentum and be wrong by 5 points. And really -- and essentially, disappoint. So we're trying to be prudent given the nature of where we are in the model. If we come out of the fourth quarter, you can have a different sense by the February call, I think we're going to -- we'll have a better view. But right now, I think -- so going forward, there's some caution just given the size of the business and how it's ramping. Respectively, though, we have not seen anything but green lights.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Last question. Some of the retailers and others are -- had a bad October in both channels, natural and conventional. Have you seen anything in order rates reflecting that?

Stephen B. Hughes

I wouldn't -- no, I don't think so. I don't think we've seen that. Now we don't -- we've actually seen the October Nielsen numbers. We had -- I think we're up more in natural. I think conventional around 40%, in that range. There's a little bit of a mixed change. We saw a little bit of the shorts, I think, impacting Glutino. But we saw some strengthening on Earth Balance, the space saver packaging to cold. So we really haven't seen anything in that sense, and as we look at our -- the other kind of weekly data we get, we haven't seen anything there that gives us concern. That's not anything that reflected in our guidance for the fourth quarter. We haven't seen that yet on our business.

Operator

Your next question comes from Scott Van Winkle from Canaccord.

Scott Van Winkle - Canaccord Genuity, Research Division

A little help on the reconciliation. Really, the interest number, and if it's in the press release, I apologize, I haven't dug through there if you mentioned it. What was the -- can you break out the actual interest and the pretax loan cost?

Christine Sacco

Yes, so Scott, this is Chris. And interest at $11.2 million in total. $7 million of that is a write-off of our deferred loan costs associated with the refinancing we did back in July. $1 million of that was some of the new cost we had expensed immediately. In the -- so about $3.4 million, $3.5 million, call it, of interest during the quarter will be our term loan. We've got $10 million drawn on our revolver. We have an unused line commitment. And not impacting Q3 but just as a heads-up for Q4, it's about $100,000 a quarter. We did take out a capital lease and financed our bread equipment with the new cap lease to lock in long-term financing on our bread line. And so that's about another $100,000 that will get you to the normal run rate for Q4. Just a reminder, it's about $400 and -- call it $430,000 a quarter of amortizational loan costs that's also in that line.

Scott Van Winkle - Canaccord Genuity, Research Division

Okay. So is about $4 million a quarter, kind of rough number?

Christine Sacco

Correct.

Operator

We have no further questions in the queue.

Stephen B. Hughes

Well, good. Well, thanks, everybody, for taking the time, and we look forward to catching up with you all. Thanks.

Operator

Thank you, ladies and gentlemen. That concludes your conference for today. You may now disconnect. Have a nice day, everyone.

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