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Boulder Brands (NASDAQ:BDBD)

Q1 2014 Earnings Call

May 08, 2014 9:30 am ET

Executives

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

Stephen B. Hughes - 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

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

David Palmer - RBC Capital Markets, LLC, Research Division

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

Reed Alan Anderson - Northland Capital Markets, Research Division

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

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

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

Operator

Good morning. My name is Emily, and I will be your conference operator for today. It's May 8, and I welcome you to Boulder Brands' 2014 First 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 May 22, 2014, and the number for the replay is (888) 286-8010. You may also listen to the broadcast by logging onto the Investor Center at www.boulderbrands.com. [Operator Instructions]

Some of the statements we will make on this conference, 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 in 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, Emily. Good morning, everyone. With me today are Steve Hughes, our Chairman and CEO; Jim Leighton, our Chief Operating Officer; and Christine Sacco, our CFO and Treasurer. Earlier this morning, we issued our first quarter earnings release. If you have not seen the press release, it is available on the Investor Center page of our website at www.boulderbrands.com. The company uses the terms organic net sales, brand profit, organic brand profit, net income and diluted earnings per share excluding noncash and certain items, EBITDA, adjusted EBITDA as non-GAAP measures. The company believes that these measures help to explain its profitability and performance in a manner which assists potential investors and security analysts to evaluate the company. Brand profit is described as gross profit less marketing, selling and royalty expense over income. EBITDA is defined as net income before 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 costs and certain other items. Organic measures are calculated excluding the impact of discontinued items and the licensing of Smart Balance Milk. In addition, organic measures for 2014 will include the results of EVOL in 2013 for comparative purposes. The company believes that the exclusion of both noncash and certain items helps 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 the earnings in our press release on our website at www.boulderbrands.com. With that, I'll turn the call over to Steve.

Stephen B. Hughes

Thank you, Carol, and good morning, everyone, and thanks for joining us. Let me provide you with the agenda for today's call. I'll provide highlights for our first quarter results, as well as specifics on our retail and consumer activities in the quarter. Chris will then review the first quarter results and update our 2014 outlook, and I will then detail what to look forward to in 2014. And then Jim -- our Chief Operating Officer, Jim Leighton, will add his comments on operations. We'll then open it up for questions. With that, let's -- a few opening comments.

Overall, despite some short-term gross margin pressure, I'm so very -- I'm very pleased with the number of positive developments in our first quarter. We had strong organic net sales growth of 18%, great momentum with our retailers and excellent progress on operations. As a result, I believe the stage is set to build both revenue and margin throughout 2014 and into 2015. While sales continue to be strong, 2 key issues are impacting our margins: higher egg white prices and mix shift to our natural brands. Regarding mix shift, over the past 3 years, we have transformed our business from primarily a Smart Balance Spreads business to a diverse and growing business in the natural food space. In addition, we have increased the complexity and changed the mix of our overall business. As a result, a number of our businesses -- as a result, our business model is transitioning from a mature, high-growth business to an early-stage growth business. We have growth brands that are in different stages of their growth cycle: Level and Boulder Brands U.K. are in the earliest cycle stages; followed by EVOL, Udi's and Glutino that each have distinct margin-enhancing opportunities; Earth Balance, with excellent margin and excellent growth prospects; and then Smart Balance, whose margins are strong but the business is more mature. Our high-growth business brands, EVOL, Udi's, and Glutino and Level, each offer a wide range of margin improvement opportunities as they scale in volume. Jim and his team have identified and are pursuing a range of low-hanging-fruit opportunities.

Secondly, and as I mentioned on our last call, we're experiencing higher egg white prices, a key ingredient in Udi's bakery items. Egg white prices averaged $5 per pound last year, around $8 a pound in the first quarter and are currently running around $14 a pound.

Chris will give more detail on the overall margin impact of higher egg white prices, and Jim will give more color on what we're doing to reduce the impact. However, given this increase, we're being prudent in updating our outlook to reflect the recent changes in egg white prices. As we move through the year and look into the future, I'm very confident that our margins will track the same positive growth path as our sales. We remain confident in our long-term plan to drive organic sales growth to 10% to 15% and build EBITDA margins to 20%.

With that, on to the first quarter results. A few high-level comments about the quarter. Overall, our first quarter results were in line with our detailed outlook provided in the fourth quarter. Total sales -- net sales increased 15%, and total organic -- and total net sales increased 18%, in line with our full year anticipated organic growth rate of 15% to 20%. Organic sales excluded discontinued items and included EVOL in both periods for comparison person -- purposes. Our Natural segment, which includes Udi's and Glutino and EVOL, reported strong organic sales growth of 40%; and our Balance segment, which includes Smart Balance, Earth Balance and Level, reported an organic sales decline of 5%. This is in part related to the timing of Easter, which fell on Q2 this year versus Q1 in 2013. Organic consumption growth for the company was plus 16%. Adjusted EBITDA decreased 3% to $17.7 million for the quarter, in line with our expectations and primarily the result of lower gross margins. Non-GAAP EPS decreased to $0.05 from $0.07 in last year's first quarter.

Now I will review the first quarter by highlighting some of the key strategies and accomplishments by segment, the Natural and Balance segments, as well as posit -- provide color on some of our retail and consumer activities.

First, our Natural segment. Our Natural brands, Udi's, Glutino and EVOL, had a very strong sales quarter. Total organic sales for the quarter from the Natural segment increased 40%. Our consumption -- organic consumption for the Natural segment increased 31%. Looking at our gluten-free brands in the first quarter of this year, Udi's net sales grew 37% year-over-year, and consumption increased 38%. Glutino's net sales grew 14% year-over-year, and consumption increased 6%. Combined, our gluten-free brands, Udi's and Glutino, increased net sales by 31% in the first quarter, and consumption increased 25%. In the quarter, Glutino's growth moderated as we exited certain categories. Most notably, we're converting Glutino's frozen items to Udi's. This includes Glutino pizzas, bagels and frozen entrees. This had a pretty significant impact on the net sales consumption for Glutino in the quarter. With Udi's, we're just continuing to see strong consistent velocity and distribution builds across all channels. Overall, we continue to gain gluten-free retail product distribution, filling in the whitespace in the category. We increased to 21.1 average items in the conventional grocery channel, up from 20% (sic) [20 items] at year end. Our third Natural brand, EVOL, had an exceptionally strong quarter. Our top-to-top calls with major customers are going very well, and retailers are particularly excited about our strategy to revitalize the frozen food category with a comprehensive range of EVOL and Udi's frozen items. EVOL has an average of 3.1 items on the shelf at conventional grocery, and we expect to increase distribution meaningfully in 2014.

EVOL posted an organic net sales increase of 153% as we gained initial placement in several key accounts. Consumption growth was over 100% in the quarter. The EVOL integration has been seamless. Phil Anson and his team have not only hit the ground running on EVOL, but have developed an ambitious 4-door frozen strategy for EVOL and Udi's that we're calling Frozen Forward. Initial meetings with customers have validated this is a very big idea.

Moving to our Balance segment, Smart Balance, Earth Balance and Level. Total organic net sales declined 4.7%, and consumption declined 3.3% excluding the impact of discontinued items in milk. In the quarter, I should note that the Easter shift to April this year versus March last year had approximately a negative 66-basis-point impact on total company net sales and a negative 165-basis-point impact on Balance segment net sales. Due to the -- looking at the April volumes we are seeing, we are confident that we're on track to deliver results in line with our plan and guidance. The Spreads category continues to be challenging. However, Earth Balance continues to be a bright spot, with net sales growth of 19% and consumption growth of 17% in the quarter. Earth Balance continues to benefit from strong growth in spreads and nut butters as well as new products. In addition, Spreads continued to gain points to distribution in conjunction with our space saver packaging launch in conventional retailers. We also received very positive feedback from our top-to-top discussions with retailers on our move to non-GMO with Smart Balance as well as a growing recognition that Earth Balance wants broader distribution. Mainstream retailers, I believe, have reached a tipping point, aggressively expanding their natural and organic product range. We are perfectly positioned to address the strategic gap, not only with Earth Balance's spreads but with EVOL, Udi's and Glutino. In several convention accounts, dollars sales per point of distribution on Earth Balance spreads is now matching and exceeding some of our top Smart Balance items. Over time, I believe our premium spreads mix will rotate increasingly to Smart -- to Earth Balance.

Now I'm going to review the Nielsen data for the 12-week period ending March 15, 2014, for our premium spreads and butter category. Overall, our dollar sales in the segment were 24.3%. The premium segment of spreads and butter industry-wide declined 6.4%. During this period, our premium brands declined 7.7%. Again, the change in timing of Easter impacted both the category and our brands. Space saver packaging and execution of our overall strategy has had a positive impact on product distribution as our total retail points distribution increased to just over 11 items as the category continues to be challenged.

Also, this quarter, we began producing non-GMO Smart Balance Spreads. As with most transitions, we had a few startup issues in terms of production, but we're now up and running, and the product began to hit the shelf at the end of March. Despite some headwinds, we managed to grow brand profit and brand profit margin for the Balance segment in this quarter. Overall, we're feeling that the Balance segment is performing as we expected in our guidance. Boulder Brands U.K. continued to build distribution, with Asda and Sainsbury coming online. I was in the U.K. in April for meetings with Tesco and Asda, and I was very encouraged by the level of engagement and support we were receiving. In Q1, Boulder Brands U.K. impacted brand profit negatively by about $600,000. However, we're moving production of all items to the U.K. and expect Boulder Brands U.K. to break even in the second half and become profitable in 2015. Finally, Level began distributing its bars and shakes in the first quarter. While not meaningfully enough to call out, we are encouraged by the breadth of retail acceptance.

Now I'd like to turn the call back over to Chris.

Christine Sacco

Thanks, Steve. Good morning, everyone. Turning to our financial results. First quarter net sales increased 15.2% to $122.9 million compared to net sales of $106.7 million in the same period last year. Our net sales benefited from a number of positive factors. Udi's grew 37.4% in the quarter as the brand benefited from distribution gains and increased product velocities. EVOL grew 152.6% over the first quarter last year with strong distribution gains in the quarter. Earth Balance continued to report strong net sales growth with a 19.4% increase during the quarter. Finally, the net sales growth in our Natural segment was partially offset by declines in Smart Balance Spreads and grocery. Total company organic net sales, which exclude the impact from discontinued items, the impact from licensing Smart Balance Milk as well as including EVOL in the prior period, increased 17.6% in this first quarter of 2014 when compared to the first quarter last year. Including the impact of purchase accounting for the EVOL acquisition, gross margin was 38.5% in the first quarter, a decline of 427 basis points. The gross margin decline was primarily related to the increase in egg white pricing, which was approximately a negative 240-basis-point hit to total gross margin, as well as the mix shift to the lower-gross-margin natural brands, which accounted for an approximate negative 170-basis-point hit to total gross margin.

Looking at the segment results. In Q1 2014, Natural gross margin decreased to 32.8% from 37.7% in the first quarter last year, excluding the onetime impact of the purchase accounting adjustment related to the acquisition of EVOL, which equates to $880,000. While Glutino margins were up 110 basis points in the quarter, overall Natural segment gross margins declined year-over-year due to higher costs associated with egg whites. The spike in egg whites reduced gross margins by approximately 510 basis points in the quarter. To a much lesser extent, we are still experiencing some first-to-market expenses related to the Udi's U.K. launch and higher trade expenses related to first-to-market events for gluten-free brands.

Turning to the Balance segment. The segment gross margin decreased 30 basis points to 46.8% from 47.1% last year. The modest decrease in gross margin in the quarter primarily reflects the sales decrease in the Spreads business due to the Easter shift, startup issues from our non-GMO launch and promotional overlap timing, offset by the licensing of its milk business and lower slotting expenses for its spreadable butter.

Now I'll discuss 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 13.6% to $14.7 million in the first quarter of 2014 from $13 million in last year's quarter, excluding the purchase accounting adjustment in 2014. Brand profit margin, excluding the purchase accounting adjustment, declined to 20.1% compared to 26% in last year's first quarter as we were impacted by lower gross margin, as previously mentioned. Brand profit for the Balance segment increased 2.2% to $18.2 million in the first quarter of 2014 from $17.8 million in the previous year's quarter due to lower marketing spend and the benefit of licensing its milk.

The Balance segment brand profit margin was up 547 basis points in the quarter. Total company operating income declined to $5.3 million in the first quarter compared to $12.7 million in the first quarter of 2013. Operating income was impacted in the first quarter by restructuring charges, asset write-offs related to integration efforts associated with Udi's facilities consolidation, fees associated with the EVOL transaction, a purchase accounting adjustment to EVOL and relocation expenses. These costs were $4.9 million in 2014 compared to $200,000 in the first quarter of 2013. Excluding these costs, operating income decreased 20.9% to $10.2 million in Q1 versus $12.9 million in last year's first quarter. Other expense of $500,000 in the first quarter of 2014 primarily reflects foreign currency losses and other taxes. In the first quarter of 2013, these activities, as well as commodity hedging, resulted in a loss of $800,000. Adjusted EBITDA decreased 3.2% to $17.7 million in the first quarter of 2014 compared to $18.3 million in the prior year's quarter. Q1 2014 net income of $400,000 or $0.01 per share compared with net income of $4 million or $0.06 per share in Q1 2013. Excluding the previously mentioned items and adjusting for a normalized tax rate of 40.6% in 2014 and 41% in 2013, non-GAAP net income in Q1 was $3.3 million or $0.05 per share compared with non-GAAP net income of $4.3 million or $0.07 per share in last year's quarter.

Now let me provide some cash flow and balance sheet highlights for the quarter. During the quarter, operating cash flow was a use of $2.2 million, and we invested $2.7 million in capital expenditures, resulting in negative free cash flow of $4.8 million. We ended Q1 with $286.2 million in net bank debt, and our leverage ratio as of March 31 was 3.64x. Capital spending in the quarter was primarily related to computer software and assets at the new Denver manufacturing facility as well as assets relating to our non-GMO initiative.

Turning to our 2014 outlook. We are reaffirming our guidance but narrowing the range on profit metrics due to the impact and uncertainty of egg white prices. We continue to expect net sales to be in the range of $540 million to $550 million. However, given the higher-than-expected increase in egg white prices to date, we are fine-tuning our profit outlook to the lower end of the ranges. As we discussed on our fourth quarter call and as Steve highlighted earlier, we are being impacted by higher prices for egg whites, a key ingredient for our gluten-free bakery business, as the prices spiked from an average of $5 per pound in 2013 to $8 per pound in the first quarter of 2014 to over $14 today. As a result, for the full year, we now expect adjusted EBITDA to be in the range of $89 million to $91 million, EBITDA to be in the range of $79 million to $81 million and EPS to be in the range of $0.39 to $0.41 per share, based on 63.6 million shares outstanding. For the second quarter, given higher-than-expected egg white prices, we expect gross margin to be approximately 37% and net income to be similar to Q1. In the second half of the year, we expect to see a sequential improvement in gross margin as operational improvements are expected to improve margin to 41% by the fourth quarter.

Despite higher egg white prices, we expect gross margin to benefit from a number of initiatives. The first is an improvement in our cost of goods, as we are in the process of improving our formulation, which requires less egg white. This new formulation is in production, and when inventories flow through, it will have a meaningful impact in Q3. In addition, we have launched a major margin improvement program, and the scale of our emerging brands, Udi's, Glutino and EVOL, provides us with a wide range of margin improvement opportunities. Second, we have the price increase that was effective as of March 1 on our Udi's bakery items. Next is trade efficiencies. This has been an area of opportunity for us for some time as we focus on improving trade and promotions for both the Natural and Balance segments. And we expect margin improvement from the U.K. business as we lap the startup costs associated with product launches and move all ambient product production to the U.K.

Some other items. Stock-based compensation is expected to be $10 million. Capital expenditures in 2014 are still expected to be approximately $20 million, and Jim will provide an operational update shortly. Our EPS outlook is based on shares outstanding on March 31 of 63.6 million shares.

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

Stephen B. Hughes

Thanks, Chris. I'm going to review our 6 key strategies for 2014 and provide some additional color on each. The first one is Project Gluten Freedom, expanding gluten-free products and velocities in all regions, the U.S., Canada and the U.K.; and all channels, grocery food service, club, drug and natural. We continue to drive our gluten-free portfolio by gaining distribution, increasing our velocities and, most importantly, driving household penetration off a relatively low base. We ended Q1 with an average of 21.1 items -- gluten-free items in conventional grocery channel. Our objective to end the year is to end the year at 25 items on average. In food service, we expect to build off a relatively small base as we gain distribution in both large and small food service formats and distributors. Currently, TGI Friday's and Smashburger are expanding our hamburger buns chain-wide. In the U.S. and Canada, we expect our efforts in 2013 for alternative channels, mainly club and drug, to develop into more significant businesses in 2014. In the U.K., given the initial success of Udi's move with Tesco, we expanded with Asda in January and Sainsbury in April, respectively. We're also producing Asda's own label of gluten-free bread, which recently was awarded Best Own Label of gluten-free product throughout all retailers by The Grocer Own Label Awards. In the U.S., we will be launching a major new dimension to our Udi's baked goods line into the bakery section in the back half of the year. Today, most gluten-free breads are sold in freezer. However, certain accounts have begun to hit velocities that weren't selling the products at room temperature on racks in the bakery section, where consumers expect to buy bakery products. As a result, we'll begin offering a flanker line of Udi's bakery items to be merchandised in racks in the ambient bakery section.

This will be a second place for Udi's, as we expect main -- to maintain our frozen placement. When sold ambient, our sales at bakery are much higher. In the case of one major customer, the velocities are 70% higher than our comparable frozen sets. This in-store bakery platform will offer variations of current products as well as new items, creating a model for dual placement in the freezer and bakery sections. We believe this is a very big idea, a very big incremental idea. Initial customer reaction has been extraordinarily positive. Second, we'll be leveraging our frozen platform through the distribution of EVOL frozen foods and build on the success of Udi's frozen pizza through the launch of a larger-format pizza, Udi's frozen entrées and handheld products. Over the past 2 months, I've participated in several top-to-top customer meetings with our retail customers on 4 major opportunities: our Frozen Forward strategy, where we're recommending a 4-door EVOL-Udi frozen entrée, pizza, handheld sandwich and baked goods range; second, continued build-out in the center of the store of gluten-free sections; third, our Udi's in-store bakery rack program; and fourth, expansion of Earth Balance spreads. The level of engagement I've seen with our customers is very encouraging.

A couple of highlights with respect to our Frozen Forward strategies. Retailers recognize that the consumer case is in dire need of a complete renovation. Legacy conventional brands no longer resonate with consumers. This is evident given that the legacy health and wellness brands saw double-digit declines in Q1. Consumers are drifting away from premium frozen products, and the millennial consumer is simply not engaging with the frozen category. Retailers believe new on-trend brands delivering high-quality products with pure and simple ingredients can be the solution, and retailers are aggressively looking for alternative brands that have potential to bring consumers back to the frozen food category. We offer that with 2 brands, EVOL pure and simple and Udi's gluten-free. Our EVOL solution, which includes protein, is a great complement to those natural frozen brands that are captive to the vegetarian consumer. Overall, I expect to see incremental distribution builds on Udi's and EVOL frozen over the next 4 quarters across many of our major customers as our new products come online and retailers hit their reset windows.

We expect EVOL to accelerate distribution materially in 2014, also leveraging our Boulder Brands sales platform. We also plan to launch 8 to 12 Udi's gluten-free entrées, handhelds and appetizers in the second half of 2014. Additionally, we'll be expanding our highly successful Udi's pizza. This product is outselling the Natural category's best-selling gluten-full pizza by 30% on a sales per point basis. Over the next 2 quarters, 4 of our top 10 accounts will expand the 9-inch pizza nationally. In Q3, we'll be launching 2 12-inch pizzas, as 70% of pizza is sold in this larger format. We expect these first 2 initiatives, frozen and gluten-free distribution opportunities, combined with strong sales per point of distribution in our gluten-free. In addition to food service, club, drug channel that are becoming meaningful -- gaining meaningful traction, all add up to building revenue momentum as we move through the balance of the year.

Third, we're revitalizing our Spreads business and accelerating SKU productivity while maintaining strong profitability. We will complete the conversion to non-GMO Smart Balance spreads by the end of the second quarter, but we're not expecting a significant sales lift as a result of this move to non-GMO. It's an important step in the Boulder Brands commitment to provide innovative, transparent and healthier food alternatives as we clearly once again differentiate our Smart Balance in the margin butter category. We should have a sense of how the consumers are reacting to this move by the third quarter of the year.

Fourth, we'll continue to leverage the strength we've seen in the Earth Balance brand through broader distribution, retail store expansion and entering into new products and categories. As mentioned, Earth Balance has been the big beneficiary of the space saver packaging initiative. Initially, as we -- additionally, as we discussed earlier, Earth Balance is beginning to gain traction in conventional grocery and categories outside its core spreads, nut butters, culinary spreads and snacks, and should gain new distribution in 2014. In the first quarter, we also launched 3 kettle chips with plant-based cheddar cheese and sour cream flavoring.

Fifth, we'll be expanding Level Life distribution through the launch of bars and shakes in the U.S. This diabetes-friendly brand is gaining traction with retailers, and we expect broad distribution by the end of 2014. With Q1 2014 resets, we began shipping products to retailers and expect to gain significant distribution as each retailer hits their respective reset window.

Finally, we expect to make investments to support the overall growth of ensuring greater operational capacity and efficiency across the organization, ultimately improving gross margins. In the near term, as we move from the first half to the second half, we'll begin to see the impact of our efforts. Our comprehensive margin improvement program should deliver meaningful improvement from 37% in the first quarter to the low 40s by year end.

With that, let me turn it over to Jim, our COO. He can discuss this further. Jim?

James B. Leighton

Thanks, Steve. Good morning, everyone. Let me give you an update on operations, our plan for capital expenditures and share with you the organization that we have put in place to drive down cost, increase capacity and consistently meet or exceed customer and consumer expectations.

Higher egg white prices are being driven by demand for healthier breakfast items among mostly quick-serve restaurant chains, which has led to increased consumption of egg white products. As a result, prices have increased nearly threefold from $5 a pound last year to $14 today. We are working with alternate suppliers to find a qualified source of less expensive dry egg whites. And as Steve has mentioned, we are working on our egg white base products to improve the quality, reduce our dependency on this ingredient. We've already gained significant ground on this endeavor.

Regarding our new Denver Florence Street facility, we've made tremendous progress stabilizing customer service. We are now at or above targeted service goals. We're also making progress in driving operational improvements in yield, efficiencies and quality across all of our facilities.

Finally, with respect to personnel, I am confident that we now have the team in place that we need to deliver against expectations of all of our stakeholders, with the hiring of key people in demand planning, operations, engineering, contract manufacturing and R&D to execute both near term and long term.

Long term, our comprehensive strategic plan has been completed. We are now in the tactical execution phase of that 3-year plan. For 2014, given the timing of where we are in the year and our long-term approach, we are still in line with what we shared with you at our last call and at our Investor Day, which is that we continue to expect CapEx to be approximately $20 million in 2014. Because of the timing of the installation and start-up of new high-speed, more efficient production lines, we will begin to see the benefits of much-needed additional capacity, more consistent quality and lower costs beginning 2015.

Our manufacturing CapEx is comprised of the following major projects: further automating our gluten-free bread line in Denver, where we have additional volume to warrant automation; and updating our Boulder frozen plant. This includes the installation of high-speed lines on buns, granola and cookies, building out an optimal co-pack network in both gluten-free and frozen for products such as frozen pizza and bowls.

So you can see we have a lot going on, all with the intention of utilizing the best people, processes, practices and projects to deliver fuel for growth and build adjusted EBITDA from 17% to 20%. We are being very diligent to ensure that these initiatives are both thoroughly evaluated and correctly implemented for the best long-term outcome. I look forward to continuing to share our progress in operations.

Now let me turn the call back over to Steve.

Stephen B. Hughes

Thanks, Jim. Let me end the call with our vision, mission and principles. Our vision is to create food solutions that give people opportunities to improve their lives. The vision is a huge endeavor, and [indiscernible] speaking, we want to be a wave of change to the packaged foods industry. Our mission is to build an enduring organization recognized for doing the right thing in our products, communities, business practices and how we treat each other. And our principles embody integrity, transparency, authenticity, teamwork, passion, a relentless pursuit of excellence and have a little fun along the way.

Now with that, let me turn the call back over to the operator for Q&A. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jon Andersen for William Blair.

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

I wanted to ask about gross margin, just to make sure I understand the progression you're anticipating throughout the year. You did 38.5% in the first quarter. You've guided to 37%, I believe, in the second quarter and, in the press release, on a full year basis, guided to 40% to 41%, which by my math implies a pretty significant uptick into the kind of 43% range in the back half of the year to hit that. Am I doing that math correctly, number one? And number two, if you could talk specifically about some of the things that you're baking into that ramp in the second half.

Stephen B. Hughes

Let me -- before I turn this over to Chris, I'll just say, at a high level, the 2 of the major moves, one is reducing egg whites in the current -- in the formula of Udi's and while improving the product, and also some toll charge improvements. Those have both been implemented and are actually happening right now. It's just that we've got to burn through inventory, and so they're going to have a nominal impact in the second quarter but will have a full quarter impact in the third quarter. But...

Christine Sacco

Yes. Jon, this is Chris. So let me just clarify a couple things. So gross margin, 38.5% in Q1. We are guiding to 37% in Q2. We are guiding to 41% by year end. So that's not the full year guidance. That's the -- we'll end Q4 at 41%. So on the comparison from Q1 to Q2, Q1 cost of goods and related gross margins include some egg whites that were purchased in Q4, when we were purchasing egg whites for, on average, $5.23 a pound. Q1 purchases jumped to almost $8 a pound on average, so some of which will flow through the P&L in Q2. So that's really the Q1 to Q2 build. Regarding the bridge to get you from first half to second half, to Steve's point, the impact of increasing egg white prices throughout the year, we are anticipating. We're essentially covered now, with this formula reduction in egg whites, through the end of the third quarter at various contract prices. Our outlook reflects those costs and also includes current prices uncovered for the fourth quarter, which today is around $14. The way I think about it is we essentially have 2 months of risk to the forecasted COGS when estimating what will be sold through this year. And so offsetting those cost increases in the back half of the year, we've got price, as we've mentioned, which went into effect March 1, but we'll really begin to see more of that heavily weighted in the back half. Trade efficiencies is a huge initiative for us this year in the first half versus the second half as we look to integrate strategies for the businesses that we have acquired as well as on the Balance side. And in terms of operational efficiencies, as Steve mentioned, the formulation change has reduced the egg whites pretty significantly. We've got a lot of overhead absorption with the increase in volumes at the Denver and Laval facilities. As Steve mentioned, co-packer toll reductions for volume increases, some of which are already baked in. And shifting our co-packing network over to the U.K. provides a meaningful increase to what, in Q1, was an investment in gross profit over in the U.K.

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

Okay. One follow-up, just a bigger-picture question. A major natural foods retailer reported earnings earlier in the week, commented on competition intensifying. They're making their own price investments in order to address that competition. How should we think about what's happening at the retail level? I mean, does this put pressure on manufacturers from a pricing standpoint? Does it -- is it an opportunity as you get more shots at kind of crossing over into conventional? I'm just trying to get a sense from you on how you see this kind of evolving and what the implications are on your business.

Stephen B. Hughes

Jon, I really think the -- this is one of the big opportunity -- biggest opportunities I've seen in my career. I think the mainstream retailer have hit a tipping point, and they are going to lean in very, very significantly to the Natural organic platform, and I think you're going to see a significant increase in our distribution of products. In reality, they only have a couple of companies to work with. They have Boulder Brands, they have Hain, they have White Wave, and we all kind of play in different sections of the store. So I mean, I've been on -- I was on -- as I mentioned in our comments, I've been on 5 top-to-top calls, and I've been selling groceries for 35 years, and it is unbelievable, the level of enthusiasm, commitment and urgency the large conventional retailers are feeling. So I think it bodes very well for our core initiatives. So I see this as an opportunity. On the other hand, the natural foods industry evolves constantly. And there are certain retailers that push the envelope, and people then catch up, and then that envelope gets pushed again. So I think it's really one of the most dynamic times I've ever seen -- I've seen in the industry, and I think we're really beautifully positioned in that trend.

Operator

Your next question comes from the line of Scott Van Winkle for Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity, Research Division

So on egg whites, I have a couple of questions. One, with the inflation we're seeing there, and you've got to assume everyone's going to push through price, does this change the price premium of gluten-free bread versus traditional wheat-based?

Stephen B. Hughes

No. I think what you're going to see, Jon (sic) [Scott], I mean, every one of the gluten-free bread brands basically solved the gluten-free bread issue differently, and they did it 5 years ago. What -- and so we may be more dependent on egg whites than other formulas, so I don't really see other pricing action happening. That said, we were actually -- we have somewhat a benefit that retailers tend to appear to be taking tighter margins on Udi's breads, so we have typically been a little lower-priced. So we don't think this price increase we've taken is going to have a significant impact on our everyday price. So as I look at it, I mean, one of the things that was interesting, we were doing a parallel project, going, okay, what's Udi's bread 2 point -- we're in the 101 stage. What's 202? And we were doing that work, and that work was leading us to a conclusion that we could improve the consistency of Udi's bread and improve other characteristics and reduce dependence on egg whites. So it was, quite honestly, a good thing we were able to do that because this really blew up in the fourth quarter, and by the first -- early April, we were producing a reduced egg white formula. So we were very fortunate that we had that innovation work going on. I think it's going to turn out that we're going to have less reliance on egg whites, and we're going to have a more consistent product, a better product under Udi's.

Scott Van Winkle - Canaccord Genuity, Research Division

Is that just a vegetable oil alternative?

Stephen B. Hughes

No, it's -- Jim, I would defer to you. It's a...

James B. Leighton

Yes, there are a variety -- as Steve said, there are a variety of different ways to manufacture and process gluten-free breads. And so one of the things we did is we stepped back and we took more of an industry-wide perspective on it. And we have a new head of R&D, new head of operations and new head of engineering. So we all went down to our Denver Street facility, had a meeting on this. And basically, what we've done is we've already reformulated, reducing egg white, including other ingredients that allow us to do that to -- also, we've found, through the consumer, we've increased quality, reduced holes in our breads and so forth. But for the second half, what we're looking at is also changing the process that we use to produce gluten-free bread. I won't get into the specifics of it because there's some IP around that, but we potentially are seeing some significant gains relative to cost of goods sold.

Stephen B. Hughes

Yes. I mean, one of the really neat things about this is, again, we're hitting the second stage of this phenomena, where we now have volume, 5 years of experience. Between Udi's, Glutino and the Davies Bakery acquisition, we actually had 3 different solutions on bread, so we put the best thinking -- some of the best thinking in the world against this. And I think we're coming up with the next stage of not only product quality and consistency, but I think we have a chance to materially reduce our long-term cost of goods on bakery.

James B. Leighton

Yes, and in addition to that, we've brought in some third parties relative to original equipment manufacturers to help us in this endeavor, so they've been very helpful.

Operator

Your next question comes from the line of Bill Chappell for SunTrust.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Steve, can you talk, I mean, just the impact of Hain's acquisition of Rudi's? And just trying to understand, I mean, I know it's a very early stage market and very big, but I would think that a given retailer doesn't need to necessarily carry both Udi's and Rudi's. And so does it really change the game, or are we really too early in the market to worry about that?

Stephen B. Hughes

Well, I think that we are very early in the market. I mean, household penetration on both those brands are very low, so there's a lot of upside for both brands potentially. I have a lot of respect for Jane Miller, the CEO of Rudi's, but we elected not to engage in that process because we already have 2 brands of gluten-free bread. Our velocities on Udi's are double anybody else in the category. We really felt that we're better off focusing on 2 things: one, getting this very exciting and very incremental opportunity on in-store bake going. That's our really lead focus. And then secondly, providing additional innovation. But if you think about this, most frozen -- most gluten-free bread now is sold in the freezer case, where you have maybe 2 or 3 brands. Well, we're launching large-format pizza, entrées. I mean, the squeeze for space in that section, we didn't think we could hold or build the Rudi's distribution. And Hain is a great company, but they're not known for driving brands. I mean, they spend 0.8% on marketing. So we think, of any of the possible outcomes on Rudi's, we think it landing with Hain is probably the best-case scenario for us.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Got it. And then switching to the overall egg white question, and I know we keep coming back to that. Is the question just you can't price fast enough to -- and with the change of this year's guidance? Or is it -- I mean, expectations for the back half and where you especially moved to the fourth quarter, that we could even go higher off of the $14 number, and so we're trying to be conservative to account for that?

Stephen B. Hughes

Yes, I think we're trying to be conservative in our guidance and reflecting that if egg whites don't come down. But if you look at the history on egg whites, from the peak to the bottom, there's anywhere from 6 to 14 months. So we think this is a short-term phenomena. We have ourselves pretty well figured out for this year. As Jim mentioned, we're looking at some other fairly fundamental changes to process that really would, beyond egg whites, would be a very significant increase. So I think we feel we have the mix of margin improvement projects to withstand a protracted $14 egg whites. Reality is, it probably won't happen. And Jim, you've got some experience with chickens, so...

James B. Leighton

Yes, I have a lot of experience with chickens. But basically, it's the demand-and-supply equation, where quick-serve restaurants' demand for breakfast items are up 25% in 2013, '14 over '12, and this demand for QSR for egg whites products is up 55% for the same period. On the other side of it, and I lived this when I was the President of Perdue Foods, if you remember, it was about 18 months ago, the price of corn, which is 2/3 of the cost of growing the chicken, that and soybean meal went through the roof. It went from about $5 a bushel to $8 a bushel. And so therefore, what the layer hen population out there did, the breeder stock, as they refer to it in that industry, is they reduced supply because they couldn't afford to feed their chickens. So as Steve said, this cycle typically takes 9 to 14 to 17 months for them to get the supply back up, and then the price will come back down.

Stephen B. Hughes

Yes, and I think, Bill, the thing that I'm -- really I sleep at night with is we've identified and put a couple major margin improvement initiatives into our guidance. But there, with Jim and his team now fully engaged, that is a long list of margin improvement opportunities that are not reflected in our guidance. So as I look out to this year, I kind of see first year, second year, third year, fourth year relative to the margins. But I think, as we go into 2015 and potentially comping maybe a lower egg white price, our margins in 2015, I'm pretty bullish about this, sitting here today, that they will be solidly back in that 40% to 45% range and maybe pushing 45% as we get over the next 18 to 24 months.

James B. Leighton

The other thing I would just -- this is Jim Leighton. The other thing I would just add quickly, Steve's been in general management, creating demand, best guy I know doing that for the last 35 years. I've spent time in general management and on the supply side. But we've also changed the mindset here at Boulder Brands, in that we're always going to have inflationary impact on our business from a variety of different sources. So it's incumbent upon our team to make sure that we offset those through a continuous improvement process.

Operator

Your next question comes from the line of David Palmer for RBC Capital Markets.

David Palmer - RBC Capital Markets, LLC, Research Division

I think this question is for Jim. I'm sure you've learned a good bit about egg white pricing dynamics lately and in the previous roles. How quickly can the supply of egg whites improve for that step change in demand that's occurred because of certain breakfast sandwiches being launched out there? Obviously, we're talking about whether these prices and these current levels are sustainable.

James B. Leighton

Well, again, we are covered through September and hopeful, through a lot of initiatives, that we're going to be able to offset any impact for the fourth quarter. But as far as recovery of supply to match demand, that's a 6- to 18-month window.

David Palmer - RBC Capital Markets, LLC, Research Division

Got it. So where are we? I mean, so that -- this is something that theoretically could correct sometime in the first half of '15, say? That's your feeling at this point?

James B. Leighton

Correct. And again, as we mentioned earlier, the other thing we're doing is we're looking at alternate supply of dry egg whites. There's a variety of different ways that we're looking at providing a supply.

Stephen B. Hughes

I think overall -- sorry. I think overall, if I thought that we'd be -- on January 1, if I thought I'd be sitting here on May 8 talking about egg whites, probably didn't think that was going to be happening. We've learned a lot, and I think we feel very good that this is a very -- is a short-term issue relative to margins. We've already taken action. Not going to get a lot of benefit from that in Q2, but we are going to get benefit from that in Q3. And between that and other initiatives, we feel pretty comfortable that egg whites will only be an upside for us going forward, not a downside as we get to Q3 and Q4.

David Palmer - RBC Capital Markets, LLC, Research Division

So changing topics. The GMO-free relabeling, reformulation with Smart Balance, has there -- can you give us an update on that? I may have missed it in your prepared remarks.

Stephen B. Hughes

Yes. They're really just...

David Palmer - RBC Capital Markets, LLC, Research Division

[indiscernible] where that is in the market?

Stephen B. Hughes

Yes, right now, I think we're probably about half converted. We're 100% converted now in production. We typically have retailers -- between us and our retailers, we typically have 3 or 4 weeks of inventories, a fairly low inventory kind of cycle. So I expect to see broad distribution in May -- by the end of May, complete conversion by the end of the quarter. We're going to start our marketing program against this in May. And trust me, we are watching this, obviously, very carefully, very closely, and we're waiting for signs of blue smoke, so to speak. But it's one of those things I think that we'll have a lot more clarity on by the August call. We are not counting on, though, any improvement in trend in our guidance.

Operator

Your next question comes from the line of Mitch Pinheiro for Imperial Capital.

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

Just a couple of things. First, on Smart Balance, do I have the revenue correct at $36 million for the quarter?

Christine Sacco

Smart Balance as brand as opposed to the segment?

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

Correct.

Christine Sacco

I apologize, let me just break that down. Yes, well, I could tell you that the Balance segment at $49.5 million. We don't specifically break out our individual brands. Obviously, the Level contribution for this period is not meaningful. And if you think of Earth Balance typically running about 1/4 of the sales of Balance, that gets you close.

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

Okay. So I mean, somewhere in the mid 30s there. I mean, that's a sizable drop from the fourth quarter. I mean, how much of that's Easter?

Stephen B. Hughes

You've got the holiday -- I mean, fourth quarter is obviously by far and away our largest quarter. We did have 2 things, not -- one was Easter, and the other was we had a couple stutter steps on the start-up of non-GMO that required -- resulted in some short-term product cuts that really happened right on the cusp of the quarter. So we were pleased with how April came in. If we look at April -- we look at the year through April, we are right on our guidance relative to Smart Balance.

James B. Leighton

Yes, and this is Jim Leighton, and we are through the issues relative to start-up of non-GMO and the other kind of almost unintended consequence, although we knew this was going to be difficult. Because it is very challenging, it somewhat insulates us, I can tell you, from other people doing this.

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

Got you. And then -- and so Level Life, you say it's sort of not meaningful. I was at a Target yesterday and saw your product in Target, the -- I guess, the chews, the shakes and the bars, and -- which I purchased, by the way. I though the products were great. The -- so the sell-in to Target, is that your primary retailer for Level Life at this point?

Stephen B. Hughes

Well, they reset earliest. We have 2 of the major drug chains coming on in the second quarter. We have a number of the major top 5 conventional retailers coming on in the second and third quarter. Obviously, what Wal-Mart does is going to be important. They don't reset until September, so we don't have visibility. We did have -- I would say this, though, this Ethan Lewis and Jennifer McGhee, who run this business, are incredible.

And the reaction that you get in front of customers is so genuine that the retailers are pulling for us on this one. So we're cautiously optimistic. Obviously, the retailers got a vote. We are -- we've got marketing programs coming up as we get -- right now, they're more customer focused, will ultimately broaden as we get broader distribution. But Ethan is -- I mean, he's such a genuine article that the kind of connection we get, it's really been fun going out on sales calls with whether it's Ethan or Phil Anson. Having the founder, who has kind of really embraced our model and sees the benefit for their business in the model and sharing -- seeing them sharing that with customers is pretty cool. So we're hopeful, and I think we'll have a lot more to talk about. Third quarter, the next call, a little bit more to -- there'll be more distribution hits. But by the third quarter earnings call, we'll have some visibility on out-of-store movement.

Reed Alan Anderson - Northland Capital Markets, Research Division

Okay, helpful. And then on -- speaking of Phil Anson on EVOL, the -- what type of -- you talked about distribution gains, I think, in your prepared remarks. Is that distribution -- you're talking new customer? I mean, I know you're heavy in Target there. Where else are you seeing the distribution gains and/or SKU per store increases?

Stephen B. Hughes

A lot of this is based on customer call reaction as a lead-up to the reset windows. But we have not had -- we're having a lot of calls who feel like Target. We've not had -- I mean, we're not going to be picking up -- in an account, we're not going to be picking up 3 or 4 EVOL items and 2 or 3 Udi's items. I think we're going to be picking up 10s, 10 of each, 12 of each. I mean, there's really been -- there's almost a desperation relative to these frozen food buyers, that they've got -- Amy's is a great brand, but that's established. They don't have a protein complement to that in the Natural space. And they see EVOL and Udi's pretty clearly as that alternative, and they basically -- we've had calls where we both said we want everything you can give us as soon as you can get it to us, which I've been, again, selling groceries for a long time. I've never quite heard that come out of the mouth of a senior executive at a top 5 customer. And we've had that multiple times, and so I think you're going to see -- we're going to see some big -- 2 or 3 fairly big hits each quarter as we hit the reset windows. But the reaction has been universally positive.

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

And how about the velocity in like sort of a same-store spaces with EVOL? Can you give us some color there?

Stephen B. Hughes

We're really pleased with what I call the new EVOL, which is what's -- you kind of see at Target. I think we're very pleased. I think -- but we are -- we feel that we've got the model to drive that velocity as we build that footprint out. I mean, when you have 3.1 items at retail, there isn't much to lean against, but when you start thinking about accounts that could have 20, 30 items, there's a lot to lean against. The interesting thing it's going to see as this strategy plays out is how -- what's happened on Udi's pizza is pretty extraordinary in terms of the instant velocity reaction. It's going to be very interesting to see, as we broaden that into entrées and breakfast sandwiches and breakfast burritos, what happens. So again, it's early on, but we're very encouraged by it. I think also, the retailers know that it's going to take some time to build the same scale with some of these legacy brands. But I think the retailers have realized that those legacy brands -- and again, I've had a hand in launching one with Healthy Choice. Their best days are behind them, and that they really need to look for new solutions to bring consumers back to the category and, probably most importantly, get the millennial engaged -- the millennial consumer engaged in the category. And they think EVOL and Udi's both fit that bill pretty nicely.

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

And then last question, so just back to this question on sort of -- I forget who asked, but about sort of price, are you seeing any pricing pressure sort of pushback from the Natural retailers? And you sort of answered, you said that mainstream is kind of leaning into the Natural channel, but I wasn't sure. I didn't know if you actually answered the question. Are you going to get calls from these Natural -- the major Natural guys, saying, "Hey, what can you do for us here on price?" Or you think it's just that broaden [ph] of demand, that listen, your price is what your price is, and that's just the way it is.

Stephen B. Hughes

Yes. I think -- we have not had those discussions. I think the focus we've seen from the Natural -- major Natural retailers is they're focused on innovation. They want to know what's new, what's next. The nice thing about those retailers is you never go to a meeting with one of those retailers where you don't come out a little bit smarter. I mean, they really have the pulse of this consumer. And we're working very aggressively on the innovation pipeline. I mean, we'll have something to talk about next quarter, some things that are hitting the market in the next several months that will be public, we'll be able to talk about. But I think the focus for the mainstream retailers is catch up, and the focus for the existing -- the kind of the real major players in the Natural channel is innovation and pushing the envelope to where the consumers are going, whether it's non-GMO, whether it's cage-free, GMO-free proteins. There's just -- it's a -- I think our -- the feedback we're getting is all about partnering with folks who want innovation, not getting pressure on price.

Operator

Your next question comes from the line of Chris Krueger for Lake Street Capital Markets.

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

Just a couple of questions. First, Christine, you mentioned the 240-basis-point hit to gross margin from the egg white issue. Can you clarify, is that -- were you referring to Boulder's total gross margin or the Natural segment's gross margin?

Christine Sacco

Yes, Chris, so that was -- I was referring to the total Boulder Brands consolidated gross margin. The impact to the Natural segment was actually 510 basis points. Just to clarify, the -- I believe we have a note in our press release that guides to full year gross margins of 40% to 41%, and I just want to clarify that we are guiding to fourth quarter 41% gross margins. It looks like that was a typo in the release, so I just want to clarify that for everyone.

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

Okay. As far as your efforts to reformulate your Udi's bread products and reduce your egg whites, can you give us -- can you quantify that at all? I mean, your egg white usage per loaf dropping by 30% or 10%, or how should we look at that?

Christine Sacco

Yes, Chris, the formula changes reduce the egg whites on average by 25% across-the-board on products. Again, we're not expecting all that flow-through to really kick in until -- you'll start to see inventories come down at those with the new formulation mostly beginning in the third quarter.

Stephen B. Hughes

But I think also, it's important to note, this wasn't -- this has really been part of an ongoing innovation product improvement strategy. I mean, Udi's is a great brand, but we do have -- we have had some consistency issues. We have had some hole issues. And so this is all part of a broader effort to say, "Okay, what's the next-generation formulation for Udi's?" It happens to be significantly less reliant on egg whites, but it's all about how we ultimately make sure the consumer is getting a better product. And again, and we're kind of on that early-stage growth curve of the category, where I think Udi's bread will evolve every 12 months as we get smarter about ingredients and get smarter about processing.

James B. Leighton

The other thing we're -- this is Jim Leighton. The other thing we're noticing in our Denver facility in running this new formula is we're running much more efficiently. So there's some benefit to that reformulation relative to efficiencies and productivity.

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

Okay. Last question. On that note, are there any other commodity concerns, near term, that we should keep our eye on, any other inputs used [ph]?

Stephen B. Hughes

I mean, the only 2 big ones that we focus on now are egg whites and soy -- and oil. And I guess Chris...

Christine Sacco

Yes, we're covered out on oil through the end of the year. I would say no. Other than that, to Steve's point, we don't have any one commodity that accounts for more than 4% or 5% of our cost of goods.

Operator

Your next question comes from the line of Akshay Jagdale for KeyBanc Capital Markets.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

This is actually Lubi on for Akshay. So first question, just a follow-up on EVOL. Can you give us any color on sort of where you are in terms of distribution? And with that business, I know it's still a relatively small business, but just wondering sort of where are you in terms of distribution on EVOL? And how do you kind of see that -- how quickly do you kind of see that ramping up over time?

Stephen B. Hughes

Yes, I mean, EVOL, I think you start with the -- it's basically a Natural foods brand that had really one major proof-of-concept mainstream customer in Target, with some other distribution, but we only average 3.1 items in conventional. I think that ramps. I wouldn't want to throw out a number, but I could say that in the back half, we're going to start seeing other customers. I mean, right now, we have, I think, 30-plus items at Target. That number is going to go up at Target this year. I think you're going to see other customers at 10, 15, 20. So I think the footprint there gets -- ramps pretty quickly. Parallel to that, we're also going to be ramping the Udi's footprint. We're obviously going to lean in -- we're going to pick -- picking up a lot of Natural distribution on the pizza into the second and third quarter. We're going to add the 12-inch pizza in the third quarter. We're going to add -- we have 4 entrées that were ready now. We're going to be improving that, a wider range of entrées. We're looking at burritos and breakfast sandwiches. So I think as you look at this through the year, I mean, we're still in the process of really trying to pin down commitments. But I can tell you personally from being on these calls that we're going to see some pretty significant step changes in distribution by customer. And I'm just -- how that impacts in that 3.1 item -- 3.1 average item today, we'll just have to see how that rolls out as we get to each of the resets.

Lubi Kutua - KeyBanc Capital Markets Inc., Research Division

That's very helpful. And then just one follow-up. You talked a little bit about a margin improvement program and some benefits you expect to see from trade efficiencies. Can you provide any more color on what exactly are some of the initiatives there? And how much of a benefit do you think it will have in '14 and '15?

Stephen B. Hughes

Well, on the trade side, and then I'll turn it over to Chris. On the trade side, we think what's really happened here is we've bought 3 -- we had Earth Balance, how we were promoting it and working that. We then bought EVOL, Udi's and Glutino. They all were small companies that had different models. We're kind of concluding that we're spending a lot of trade on everyday price. And really what we need to be spending trade on are big events that drive major -- just major household penetration gains. And we think by structuring that, we can move down our trade by 10% over time without -- while increasing impact of the trade. Because these small companies, as they grow up in the Natural foods channel, are pretty captive to a certain model that is not really about driving performance because they're too small. It's really about the kind of the tax they have to have in that space. We think one of the real opportunities we have is to get very smart about what drives household penetration and buying rate on an emerging crossover brand like these. And Chris, do you have any other thoughts on that?

Christine Sacco

No, I'd agree. And I would just add, I mean, that's one of the back half versus first half margin improvements. It got -- Q1 and Q2 kind of got hit with some first-to-market events, including the launch in Q1, the heavy launches in the U.K. So the trade efficiency program really is a back-half initiative.

Stephen B. Hughes

It's not catastrophic reduction. I think it's resetting the programs to things that really are driving material events that drive real household penetration growth and buying rate growth. And the mix of that, we think we can tick up -- we could pick up some net trade percent reduction in that process.

Operator

Your next question comes from the line of Andrew Wolf for BB&T Capital Markets.

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

On the egg white impact and numbers, I just want to go through the math using whole dollars. So it looks like it's hit -- if prices had been flat instead of inflated a lot, would it -- EBITDA would have been and gross profit would have been up about $3 million this quarter?

Christine Sacco

It's about $2.5 million.

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

$2.5 million. Okay, and that's going to get a little worse in Q2, and I assume that's because there's input cost and the pricing is even higher on average?

Christine Sacco

It's -- you're -- that's absolutely right. In Q2 and Q3 sequentially, and Q4, the pricing is up, but remember that in Q1, we didn't have any impact of the formula change. So it will be mitigated at some point. The way I think about it, there's about -- again, there's about $2 million at a '14 price, and we're covered through September. With inventory turns, there's about a $2 million risk out there in terms of our COGS or our margin.

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

Yes, but Chris, then why is the Q2 gross margin sequentially going to be a little lighter?

Christine Sacco

Because the biggest jump in the egg white prices has really happened in Q1, and then again, you go to current prices. So flowing through our COGS in the 38.5% margin in Q1 are some egg whites that were purchased in Q4 at a price that was somewhere in the $5.25 range, so that's flowing through COGS in Q1. That's the biggest difference -- the difference in that change is about 120 basis points of gross margin. And you can see we're calling for a 37% gross margin in Q2, which is about 150 basis points.

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

Got it. And then through the change in formulation, that sequentially, that goes -- that actually flips through a contributor, just getting the egg white down that much, right? So it nets out -- so basically, it sounds like it nets out to the $3 million cut in the high end of the EBITDA guidance? Is that how should we think about it for the year?

Stephen B. Hughes

Yes. Exactly.

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

Okay. I mean, everything you're saying about your earnings this quarter, next quarter for the guidance is tied to this -- what's going on with the egg whites. There's nothing really other than that, that's changed very much versus your plan?

Christine Sacco

That's exactly right. Now the year-over-year impact of where we -- we were talking about $10 million on the last call. Now it's $13 million, and so that's exactly right. All the other lines on the P&L, we're reiterating.

Stephen B. Hughes

Yes. I mean, again, I think as I start off, I mean, not really -- commodities are what commodities are. Not pleased with the impact they had on the first quarter. That's -- we aren't -- and we're working that issue, and I think we feel confident we've got that issue solved. But when we look at everything else net of egg whites for this quarter, we are much more -- we validated a number of key initiatives: the Frozen Forward, which is a 4-door frozen vision that we're sharing with customers and they're leaning to aggressively; we've validated the in-store bake move on Udi's, which could be a significant incremental opportunity. It will build this year, but as we get into 2015. So we're seeing green lights on everything except egg whites. And we've got that program -- we've got that issue addressed. And I think, sitting from my standpoint, I am so much more confident with this management team. Jim has made some incredible additions in terms of top talent. But not only do we have the talent, now they've been on the field working some pretty challenging issues, and the outcomes on those are very encouraging. So I think as I look at beyond these -- a couple of margin improvements that we are reflecting in our guidance and look at the broader market improvements -- margin improvements he's working, I -- the team is working. I'm very bullish on what we can do with our gross margins over the long term.

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

Okay. And my -- just my follow-on is on the changing the recipe for the bread. My understanding of how the gluten-free shopper shops the store is they go category by category and sort of word of mouth, finding the best-tasting alternatives to a wheat-based product. So what kind of consumer studies have you done? And have you done the full gamut to make sure what has made Udi's special to the consumer is not going to be compromised?

Stephen B. Hughes

Yes. And we feel good about that. We feel that requires to -- we had opportunities to improve our current bread. We've had an issue over time on holes in the bread that flares up and is fairly chronic. We think this addresses that. And we think the biggest change consumers are going to see on this bread versus the original formula is they're going to see a heck of a lot less holes, and the holes they see are going to be small holes. So it's going to be more artisan. But we've really -- again, it's -- this was a project we've been working on. We didn't activate this in 2 weeks. We basically were looking at this as how to address the #1 issue. The #1 issue we get from consumers on our -- we've got 1.9 million Friends of Udi's now -- or 1.8 million Friends of Udi's. The number #1 issue we get are holes on Udi's, while on our Glutino bread, we get no hole issues because that's a different formula that's much lower dependent on egg whites. So I think we feel pretty good that we have taken a step up in quality while also getting less reliant on a pretty volatile commodity.

James B. Leighton

Yes, this is Jim Leighton again. And as Steve mentioned earlier, I think it's important to note, based upon the number of times the 2 words egg whites have been used today, that all of this really started with the consumer, and we always start with the consumer. So we started with the consumer. We recognized we had some holes and some opportunities in quality. So that led us to take a look at reformulation, and then when the egg white thing hit and with new people on board, we just expedited it. We just moved forward a little bit faster. But we're always putting our products in front of consumers to validate what we're doing is correct.

Operator

Your next question comes from the line of Jon Andersen for William Blair.

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

I just wanted to ask about the in-store bakery wrap program for Udi's. Could you talk a little bit more about that, Steve? Maybe how quickly you intend to go after that opportunity, how big that piece of the business could be relative to the rest of Udi's bread, and are there margin implications that we should be considering as well?

Stephen B. Hughes

I think this is almost as -- I'm putting the category as exciting as the Frozen Forward opportunity because we have about 25% of our business right now that's sold on -- in the bakery section, where it's shipped in frozen and it's slacked out on shelf, and we have the velocity to support that. But that's really being done with essentially 3 customers. So it's probably being done in 15% of our business base. And we've done the analytics to say that in -- and we had one chain that actually had some divisions in-store bake, some divisions frozen. We -- it's selling 70% faster in the in-store bake. We also know -- and we've got -- as we look at -- Bimbo has launched their Goodbye Gluten in the bakery section in accounts that we are in the frozen food section in those stores, and it's maybe 10% ACV. They're selling about half the velocity of Udi's, but in the accounts with Goodbye Gluten, we're up 32% on Udi's bread. And accounts without Goodbye Gluten, we're up 32%. So we really believe this is going to be a highly incremental opportunity because it's going to appeal to a different shopper in the section they're buying bread. So we are getting great reaction from retailers. I think we'll have -- we're going to start shipping this in the third quarter. I think we're going to see -- we might jump out and get 20%, 25% ACV on this fairly quickly. We think, next year, that will build. So it could be -- we're doing, this year, $150 million of Udi's bakery. It could be -- in 2015, it could be a $50 million kind of opportunity. Again, we've got a lot to learn about it, but we're getting -- customers see the need, and it's interesting because you're going to customers where, typically, you have product already selling well in frozen. Well, the frozen bar don't want to give it up. But the person the frozen bar reports to is saying, "I'll take both. I'll take it." So this is going to be a second placement, and I think it could be -- between these 2 propositions, it could be that we'll be the #1 and 2 -- ultimately, could be the #1 and 2 gluten-free bakery brand and sub-brands going forward. So we're pretty bullish on it, Jon.

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

Okay, that's helpful. Just one more. I have to ask about Glutino because the consumption growth for Glutino has slowed quite a bit over the past several quarters, and I think you said in your prepared remarks that consumption growth was about 6% in the quarter. It -- is that a function of that brand kind of settling into regular category growth rates as opposed to benefiting from incremental distribution, or is there something else kind of going on there and we may expect to see some kind of a reacceleration in consumption growth going forward?

Stephen B. Hughes

Well, I think that we've got some great initiatives on Glutino to drive the consumption. But these -- what basically we decided was we really are going to go with Udi's and frozen. So we discontinued the gluten -- we're discontinuing the Glutino frozen items and converting some of those items that are worth converting to Udi's, with some variations. That's about 6 points of the decline. So I think going forward, I -- we expect to see Glutino in that 10%, low double-digit kind of growth range. We -- clearly, Udi's is a hotter hand. We like the growth rates we see on Udi's today. We think with the in-store bake and frozen, our ambition is to maintain those going forward, maybe improve those going forward. So -- and we're seeing things in certain channels, where we'll take a Glutino item in to present, club, for example, and they love the idea and they say, "I want that under Udi's." So it's pressing the question of, in some channels, do we want to adapt some of the other Glutino items and take them into that channel under Udi's. So it's -- but Udi's still -- the beautiful thing about these 2 brands is the [indiscernible] we had, which are about 6 months old, there's only about a 22% overlap in user group. So we still are appealing to an important user. Glutino is still the #2 brand. It's not going to grow as fast as Udi's, but the team that's working on that, we had a business review the other day, very bullish about the range of initiatives they're working on that will drive top line growth and make up for this kind of air pocket we're creating for the brand by discontinuing some nonstrategic items for Glutino that are strategic for the total portfolio, or just moving those to Udi's.

Operator

I would now like to turn the call back over to Steve Hughes for closing remarks.

Stephen B. Hughes

Great. Well, thank -- again, thank you, everybody, for taking the time, and we look forward to following up with you after the call. Thanks much.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: Boulder Brands' (BDBD) CEO Stephen Hughes on Q1 2014 Results - Earnings Call Transcript
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