Boulder Brands' (BDBD) CEO Stephen Hughes on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Boulder Brands, (BDBD)

Boulder Brands (NASDAQ:BDBD)

Q2 2014 Earnings Call

August 07, 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

Scott Van Winkle - Canaccord Genuity, Research Division

David Palmer - RBC Capital Markets, LLC, Research Division

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

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

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

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

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

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

Operator

Good morning, ladies and gentlemen. My name is Derek, and I will be your conference operator today. It's August 7, and I welcome you to Boulder Brands 2014 Second 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 August 22, 2014. The number for the replay is (888) 286-8010. You may also listen to the broadcast by logging on to the Investor Center at www.boulderbrands.com [Operator Instructions]

Some of the statements we will make on this conference call include 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, Derek. Good morning, everyone. With me today are Steve Hughes, our Chairman and CEO; Jim Leighton, our Chief Operating Officer; and Christine Sacco, our CFO. Earlier this morning, we issued our second 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 non-cash and certain items, EBITDA and adjusted EBITDA as non-GAAP measures. The company believes these measures help to 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 and income. EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA as adjusted for stock comp -- stock-based compensation, purchase accounting adjustments, restructuring, acquisition and integration related costs and certain other items. Organic measures are calculated excluding the impact of the licensing of Smart Balance Milk and including the results of EVOL in 2013 for comparative purposes.

The company believes that the exclusion of both non-cash 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 to 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 non-GAAP measure to the closest applicable GAAP measure. You can find our earnings press release on our website.

With that, I'll turn the call over to Steve.

Stephen B. Hughes

Thank you, Carole. Good morning, everyone, and thanks for joining us. Let me give you the agenda for today's call. First, I'll provide highlights from our second quarter, as well as some specifics on our customer and consumer activity in the quarter. Chris will then briefly review our financial results and outlook. I'll then review -- take a look forward to what we should expect for the remainder of 2014. And then we'll open the call for questions.

With that, a few high level comments about the quarter. Overall, another quarter of strong sales momentum, driven by both retail acceptances and consumer takeaway. Total net sales increased 18.7%, organic net sales increased 19.4%, ahead of our full year anticipated organic growth rate of 13% to 18%. In the quarter, organic growth for our Natural segment, which includes EVOL, increased 34.8%. EVOL delivered its first quarter of sales exceeding $10 million.

Our gluten-free brands, Udi's and Glutino, combined reported strong net sales growth of 26.9%. While sales continued to be strong, 2 key issues impacted our Q2 gross margins: higher egg whites and the mix shift to our Natural brands. On egg whites, which impact our Udi's bakery items, the team has successfully addressed this unprecedented spike in the commodity cost.

While not impacting Q2 results, changes were made in Q2, which began -- which will begin to positively impact the results in Q3. The combination of the price increase, formula changes, cost reductions, and securing egg whites for the balance of the year, will result in a strong rebound in gross margins in the second half.

We have significantly reduced our reliance on egg whites, while improving the quality and consistency of our Udi's bakery items. Jim Leighton and his team have done a remarkable piece of work on this project. Also, we have secured supply for the balance of the year, between $9 and $9.50.

Regarding mix shift. Over the past 3 years, we've transformed our business from primarily the established Smart Balance Spreads to a diverse growing portfolio in the Natural food space. Udi's and EVOL are early-stage brands. And while gross margins today are below our corporate average, work is underway to leverage the emerging scale of these brands and improve margins materially in coming quarters. The stage is set to build both net sales and margins throughout the second half of 2014 and into 2015. As we move through this year, and look to the future, we are confident that our margins will track the same positive growth path as our sales.

Adjusted EBITDA was flat at $17.6 million for the quarter, in line with our expectations, and primarily driven by the lower gross margins. Non-GAAP EPS was $0.05, in line with our plan.

Now let me review the second quarter by highlighting some of our key strategies and accomplishments by segment, Natural and Balance, as well as provide color for our consumer and customer activity.

First on the Natural segment. Our Natural brands, Udi's, Glutino, and EVOL had a very strong sales quarter. Total organic sales for the Natural segment increased 34.8%. Total organic consumption for the Natural segment increased 34.2%. Overall, we continue to gain distribution on gluten-free, filling in the whitespace in the category and increasing to 22.1 average items at conventional grocery retail, up from 20 at the start of the year.

Our third Natural brand, EVOL, also had a very strong quarter, exceeding $10 million in net sales for the first time. Our top-to-top calls with major customers on our Frozen Forward strategy are going exceptionally well. But conventional and Natural retailers are engaged and excited about our strategy to revitalize the frozen food category with a comprehensive range of EVOL and Udi's frozen items.

EVOL has a current average of 4 items on shelf in conventional grocery stores today. We expect to increase distribution meaningfully in the coming quarters. EVOL posted an organic net sales increase of 131.2%, as we gained initial placement in several accounts and consumption growth was over 100% in the quarter.

Moving to the Balance segment: Smart Balance, Earth Balance and Level. Total organic net sales increased 1.4% while consumption declined 7.2%, including the impact -- excluding the impact of milk. The growth in net sales is partially the result of decline in some of our couponing programs, which we determined did not have a meaningful impact on long-term velocities. Despite the continued challenge in the spread category, Earth Balance continues to be a bright spot, with net sales growth of 18%, and consumption growth of 17.3% in the quarter.

Given Earth Balance's strong roots in the Natural channel, conventional retailers are beginning to view Earth Balance not as a spread, but as a plant-based alternative to butter. We expect to see expanded distribution of Earth Balance in conventional retailers over the next 12 months. Also during the quarter, we launched Earth Balance Vegan Mac & Cheese and a cheddar cheese square snack. While early, we are very encouraged by the initial consumer takeaway.

The transition to non-GMO Smart Balance Spreads is complete across all accounts. It will take some time to understand how the non-GMO proposition is resonating with the consumer and we should have an indication by the end of the third quarter. Despite some headwinds, we once again managed to grow profit and profit -- brand profit margin for the Balance segment this quarter.

With that, now I'd like to turn the call over to Chris. Chris?

Christine Sacco

Thanks, Steve. Good morning, everyone. Turning to our financial results, second quarter net sales increased 18.7%, $131.3 million. Our net sales benefited from a number of positive factors.

Udi's grew 33.7% in the quarter, as the brand benefited from distribution gains and increased product velocities. EVOL grew 131.2% over the second quarter last year, with strong distribution gains in the quarter. Earth Balance continued to report strong net sales growth, with an 18% 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 licensing Smart Balance milk and includes EVOL in the prior period, increased 19.4% in the second quarter of 2012 -- excuse me, 2014. Gross margin was 35.7% in the second quarter, a decline of 610 basis points. The gross margin decline was primarily related to the increase in egg white pricing, which was approximately a 210-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 190-basis-point hit to total gross margin. The exit from milk in last year's second quarter was an offsetting benefit in the current quarter.

Looking at the segment results. In Q2 2014, Natural gross margin decreased to 29.1% from 37.3% in the second quarter last year. The spike in egg whites reduced gross margins in Natural by approximately 350 basis points in the quarter.

Turning to the Balance segment. The segment gross margin decreased 30 basis points to 46.1% from 46.4% last year. The modest decrease in gross margin in the quarter primarily reflects the sales decrease in the Smart Balance Spreads business, offset by the licensing of milk and lower slotting expenses for spreadable butter.

Now I'll discuss brand profit by segment. For the company's Natural segment, brand profit increased 4.4% to $12.6 million in the second quarter of 2014 from $12 million in last year's quarter, primarily resulting from the lower gross margin mentioned previously. Brand profit for the Balance segment increased 4.2% to $18.5 million in the second quarter of 2014 from $17.7 million in the previous year's quarter due to lower marketing spend and the benefit of licensing milk. The Balance segment brand profit margin was up 400 basis points in the quarter.

Total company operating income declined to $8.6 million in the second quarter compared to $10.7 million in the second quarter of 2013, due to the lower gross margin. Other income of $400,000 in the second quarter of 2014, primarily reflects foreign currency gains. In the second quarter of 2013, these activities, as well as commodity hedging, resulted in a loss of $700,000. Adjusted EBITDA was flat compared to last year at $17.6 million. Q2 2014 non-GAAP net income of $3.3 million or $0.05 per share, compared with $3.8 million or $0.06 per share in Q2 2013.

Now let me provide some cash flow and balance sheet highlights. During the quarter, operating cash flow was a source of $2.9 million, and we invested $3.4 million in capital expenditures resulting in negative free cash flow of $500,000. We ended Q2 with $285.9 million in net bank debt, and our leverage ratio as of June 30, was 3.63.

With respect to the balance sheet, one item to note: we invested $9.3 million in inventory in the second quarter, and $8.2 million in the first quarter, for a total of $17.5 million year-to-date.

Recall at the end of 2013, we had out of stocks and missed sales due to inventories that were too low. We've now built them back up to an appropriate level for our business, which reflected in our case fill levels that are currently at 99%.

Another item to note. On July 28, we announced that we amended and repriced our existing senior secured credit facility. We increased our Term Loan B from $273 million to $300 million and our 4-year revolving credit facility from $80 million to $115 million. The Term Loan B interest rate was lowered from 5% to 4.5%, resulting in approximately $1.4 million in annual cash interest savings, based on debt outstanding immediately prior to the refinancing.

These savings will be partially offset by increased borrowings under the term loan, as well as increased revolver capacity. We utilized the favorable market environment to not only lower the company's overall interest rate, but secure less restrictive covenants and provide for more financial flexibility going forward.

Regarding our outlook. We are reaffirming our guidance for the year. We continue to expect net sales to be in the range of $540 million to $550 million, organic net sales growth in the 13% to 18% range, with the Natural segment expected to come in at the high end of the range of 25% to 30%, and Balance to be flat to slightly positive. 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 64.1 million shares outstanding.

Regarding the quarterly flow of earnings for the back half. For the third quarter, we expect earnings per share to be in the range of $0.10 to $0.12 per share and the fourth quarter to be in the range of $0.18 to $0.20 per share.

In addition, we still expect gross margin to improve to 41% by yearend from an average of 37% in the first half of 2014, or approximately a 400-basis-point improvement. As we move from the first half to the second half of the year, we will begin to see the impact of our comprehensive margin improvement program.

Four key areas should contribute to the overall improvement in gross margins. First, the majority of the improvement will come from the reduction of inefficient trade and coupon spending, as we are gaining efficiencies with our retailers across our brands.

Second, effective in Q3, we will begin to feel the benefit of the price increase on Udi's Bakery we implemented to offset the higher egg white cost.

Third, we reformulated our ingredient profile, which is now less dependent on egg whites. And finally, we have a number of operational initiatives, as we focus on continuous improvement projects that are already beginning to contribute to margin enhancement.

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

Stephen B. Hughes

Thanks, Chris. Let me update you on our 6 key strategies for this year, and what to look forward to in the second half. First, on Project Gluten Freedom, our strategy of expanding gluten-free products and velocities in all regions: the U.S, Canada and the U.K.; and all channels: grocery, food service, club and drug.

First, we'll continue to drive our gluten-free portfolio by gaining distribution, increasing our velocities, and most importantly, driving household penetration. A few items to note for the back half. In food service, we will be launching Udi's with 2 national restaurant chains in the second half of the year. Further evidence of the gluten-free trend is expanding to all channels. For competitive and confidentiality reasons, we'll provide more color on these actual accounts once they're launched.

In the U.K., given the initial success of Udi's at Tesco and Asda, we have also expanded with Sainsbury's. In the back half, we should benefit from additional increase in distribution at these 3 accounts, as well as adding a few additional smaller accounts. Also, we should see this business achieve profitability, as we'd increase capacity utilization at our U.K. bakery, and bring on an in-market co-packer for all grocery items. By the end of Q3, we'll be producing all Udi's items in the U.K., and we'll no longer be importing products from North America.

Finally, as noted last quarter, in North America, we are preparing the launch of a new Udi's baked goods line into the bakery section, in the back half of 2014. This is a major strategic initiative. Udi's bakery items will now be merchandised in racks in the ambient bakery section, a second placement for Udi's bakery products.

We will simultaneously continue to build on our highly successful placement in the frozen food aisle. But ironically, to date, the bakery departments and conventional retailers have not participated in the gluten-free trend. We believe the launch of Udi's in-store bake, has the potential to be highly accretive and a high-velocity proposition. We will be selling Udi's bread where bread is sold in the bakery. Initial consumer reactions have been excellent, and we expect to start shipping several of our top 10 customers in Q3.

Second, we will continue to leverage our frozen platform to the distribution of EVOL frozen foods and build on the success of Udi's frozen pizza with the launch of a large format pizza, Udi's frozen entrées and hand-held products.

Consumer reaction -- customer reaction has been universally positive and we expect to accelerate distribution for EVOL and Udi's frozen in the back half of the year.

At Target, our most developed account on EVOL, retail sales is reported by Nielsen in the last 12 weeks. EVOL is already the #10 brand out of over 100 brands in all of frozen, ahead of Healthy Choice at #15 and just behind Stouffer's red box at #8.

In Q2, we began shipment of a terrific line of 8 items for EVOL breakfast sandwiches and breakfast burritos. A comparable line of Udi's breakfast items will begin to ship [ph] in Q1 2015.

Third, revitalizing our spreads business and accelerating SKU productivity, while importantly, maintaining strong profitability. As mentioned, we launched non-GMO spreads as an important step in Boulder Brands' commitment to provide innovative, transparent and healthier food alternatives. We should have a sense of how the consumers are reacting to this move by the third quarter call.

Fourth, we'll continue to leverage the strength we are seeing in Earth Balance brand. Earth Balance is gaining traction in spreads, nut butter and snacks, as retailers are giving us more items on shelf across all 3 categories. One of our top 5 conventional retailers is taking the unprecedented step of expanding Earth Balance spreads from 2 to 12 items and making it the focus of the entire spread section. This account resets in September and we'll be tracking the impact of this reset closely.

Fifth, we'll be expanding Level Life distribution through the launch of bars and shakes in the U.S. We expect broad distribution for this diabetes-friendly brand by the end of 2014. Finally, we'll continue to invest to support the overall goal of ensuring greater operational capacity and efficiencies across the organization, ultimately improving gross margins.

As Chris discussed earlier, we have a number of margin improvement projects expected to impact the second half, the reduction of inefficient trade and consumer coupon spending. The balance of the price increase on Udi's bakery, egg white supply chain initiatives and formulation of the cost improvements. The bulk of operational efficiency improvements, which should positively impact Q2, will have even greater benefits in 2015 -- or excuse me, in the second half, will have a greater impact in 2015.

And finally, in Q2, Jim Leighton completed the hiring of the senior operations team. This is a world class team that is going to have a profound impact on our margin structure, the quality of our products, the pace and quality of our innovation in coming quarters and years.

Our formalized cost savings initiative called Project Challenge is being led by Chris and Jim, and is expected to yield significant savings, while improving the consistency and quality of our products.

Capital spending is on track to further automate lines, reduce downtime and enhance capabilities. Overall, the objective is to improve products at the lowest possible cost.

With that, let me end the call with our vision, mission and principles. Our mission -- our vision is to create food solutions that give people opportunities to improve their lives. This vision is a huge endeavor, and humbly speaking, we want to be one of the -- want to be a wave of change in the packaged foods industry.

Our mission is to build an enduring organization, recognize we're doing the right thing in our products, communities, business practices, and how we treat each other. And our principles embody integrity, transparency, authenticity, team work, passion, and the relentless pursuit of excellence and have a little fun along the way.

Now let me turn it back over to the operator, for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will be from the line of Scott Van Winkle, Canaccord.

Scott Van Winkle - Canaccord Genuity, Research Division

So Steve, first, EVOL. North of $10 million of sales. I actually come up with something north of $11 million of sales. Is that a 50% sequentially? Or do I just have some bad numbers? It just seems like a big number when I back into it.

Stephen B. Hughes

It went from -- I think first quarter it was $8 million, and stepped up to $10 million.

Scott Van Winkle - Canaccord Genuity, Research Division

All right, got you, $8 million to $10 million. And, I mean, I think when you bought this business, you were expecting strong growth in '14, but you're tracking well ahead of your expectations in EVOL year-to-date, aren't you?

Stephen B. Hughes

Yes we are. And I think the first half was really based upon the work of Phil and his team already had in the works. I mean, they had terrific programs up at Target, they had engagement from accounts like Safeway that have come more late in that first half. The real exciting about EVOL is that we're really just getting started and now that our sales team has had a chance to kind of broaden the selling effort, I think we're going to see a lot of -- a good number of our top 20 accounts take a step on EVOL before yearend. And I think that will range anywhere from 7 to 10 items to, in some cases, 40 items. So I think it's exceeding -- really is exceeding our expectations. And it really has opened the door -- one of the reasons we made this acquisition was as much for the team as it was the brand. Phil and his team are responsible for the Udi's frozen and that will begin to really materialize here in the second half for us as well.

Scott Van Winkle - Canaccord Genuity, Research Division

When you think about it in the core burrito business, is there -- what's the second or third kind of category in the product line that's really working?

Stephen B. Hughes

Well, the mainstream bowls, it really ought to go in -- everybody ought to go into a Target. I mean, this is -- I mean, I've been selling -- I experienced a big launch in Healthy Choice back in '88 and I've never seen anything quite like what's happened at Target for a new brand essentially. But it basically is burritos, bowls, which was kind of single-serve entrees, the skillet meals that are for 2 people and now, the breakfast sandwiches and burritos. And we have a pretty exciting new product coming out, that will be starting to show up in the second half as well, which we'll talk about more when it happens, but what we have is, I think, a kind of a complete solution. I mean, what the retailers have seen is like a complete implosion of the legacy brands: Healthy Choice, Weight Watchers, Lean Cuisine, are all down systematically and -- for the last 3 to 4 years. The only real Natural brand of scale was Amy's. It's a $500 million brand, terrific brand, but it's a vegetarian-based brand. So what we're really doing is offering a comprehensive complement with protein, EVOL, which is pure and simple and Udi's, which is obviously gluten-free. And I think over the next 12 months, what's going to happen in our frozen platform is going to be pretty remarkable, and I think it's really solving a major consumer issue and filling a real vacuum that the retailers are feeling, which is I've got all these expensive space and declining -- a declining business. So they're ready to shift to, really, those emergent Natural brands that can provide a complete solution.

Scott Van Winkle - Canaccord Genuity, Research Division

And Chris, on the gross margin, I think you kind of called out 400 basis points of the decline between egg whites and mix. The other 200 roughly basis points of decline year-over-year, is that underutilization of capacity with the new facility coming on? Or what can you give on the rest?

Christine Sacco

Yes, Scott. The underutilization for the new facility is about 120 basis points, which we'll normalize next quarter as we lap the entrance into Florence Street. And the other 90, roughly, basis points relate to the transition to non-GMO.

Scott Van Winkle - Canaccord Genuity, Research Division

On the reformulation, obviously, we knew they were going to this. Is there any way to kind of measure how much reformulation you've done away from egg whites to maybe full eggs or something of that nature?

Stephen B. Hughes

We don't really want to talk specifics because we think they're -- we really kind of cracked the code on Udi's 2.0. But it's significant. And the quality and consistency has gone up. I mean, we've seen a significant drop in concerns with holes in bread and we're actually going to add x-ray equipment to the end of the line, so we -- the chronic issue with gluten-free bread is tunneling, since the gluten hold together. I think we're on a track to really eliminate that completely. We reduced it materially with this recent formulation. I mean, Jim, do you have any thoughts?

James B. Leighton

Yes, we've talked about this in previous calls and it's kind of come together. And that we've gotten to gluten-free 3 different ways with the acquisition of Udi's, Glutino, as well as Davies, and we're taking the best practices of all those, putting it together and we're starting to see the results and favorable results relative to quality as well as cost.

Scott Van Winkle - Canaccord Genuity, Research Division

All right. And one more, if I could. I know you don't want to mention the restaurant chains you're launching, the 2 restaurant chains you're launching in the back half. But how about the product category, I mean is it -- is this something like your bread is going to be used as an alternative? Or is it simple as like a pre-packaged muffin? Or I'm wondering what kind of product category it would be?

Stephen B. Hughes

We obviously want to leave it to the accounts to make the announcement, but suffice it to say, these are major league household names, and I think it is also the tip of the iceberg. We're probably engaged with 10 other major food service chains -- restaurant chains, across all formats in some level of conversation or development. So as we said, we're hoping, this year, we get 1 major hit on the board. I think we feel pretty good we're going to get 2 major hits on the board, but I think it's just kind of -- could open the floodgates in 2015.

Operator

Your next question will be from the line of David Palmer, RBC Capital Markets.

David Palmer - RBC Capital Markets, LLC, Research Division

The egg white prices, you said they were locked in through 2014. And you've already done some reformulation to reduce egg white usage. Given the egg white pricing year-to-date on the commodity, year-to-date, that, that would imply that perhaps, you might lap over these hedges unfavorably into '15, but then again, you've done some reformulation. How should we think about that impacting that exit rate gross margin of near 40%, 41% into '15? Can you hold those gross margins or perhaps, will egg whites be a bit of a hit again in that outlook?

Stephen B. Hughes

Let me talk overall. I'll let Chris talk specifically about egg whites. But we really think that we're on track to get our gross margins solidly over 40% going forward. And there is a lot of margin improvement -- maybe after Chris, you talked -- Jim you want to talk a little bit about what you're doing in terms of the co-pack discussions we're having. But I think overall, we really feel that with the team we have in place, that we should be looking to be solidly over 40%. Would you ever get back to 45%? I'm not suggesting we're going to do that, but I think, 40%, 42% gross margins should be something that we, as an organization, are targeting. So Chris, why don't you talk about egg whites?

Christine Sacco

Yes, David, just on egg whites, I mean our Q4 guidance includes egg whites between $9 and $9.50. I think for 2015, it's too early to call a price on egg whites. However, the supply-demand environment appears to be improving and one commodity resource that we've been looking at is projecting dried egg whites to be 25% lower in '15 than '14. So I think we're going to start to see the correction or overcorrection there. And to Steve's point, I think the -- between the trade efficiency initiatives that we're working on, as well as the price increase at Udi's bakery, and then the continuous margin improvement, those are all kind of getting up to speed in the back half. So we're expecting to feel the impact of those largely in '15 going forward.

James B. Leighton

The other initiative -- this is Jim Leighton, that we're working on is, it's really almost a roadshow. We spent a lot of time out there talking to a variety of co-packers with scale. They can produce our products from baked goods to frozen and so forth. And as a matter of fact, I just got off the road talking to people who are very, very interested in producing products for us. So there's a lot of excitement, a lot of interest, and we'll be able to share a lot more with you at the end of Q3 concerning that.

Stephen B. Hughes

I mean, I think the intent is moving from where we are, in some cases, on batch [ph] production, where we're making, let's say, burritos at 100 a minute, when there are people out there making 300 and 400 a minute. And be able to scale this business, potentially, without significant capital requirements. So I think, Jim's -- he's in the middle of it right now. But by the end of the third quarter, when we have that call, we should have -- be reporting on some partnerships we formed, and I think that's going to bode well for 2015 margins.

David Palmer - RBC Capital Markets, LLC, Research Division

Okay. And just one more question on Glutino. Obviously, the comparisons have been tough there for that brand. What is your outlook for that brand? And how do you look at the momentum year-to-date and the performance of that brand?

Stephen B. Hughes

Yes. I think, the -- right, I mean, 9% this quarter, we had about, what, 500, 600 basis points...

Christine Sacco

400 to 500.

Stephen B. Hughes

Of discontinued items. So maybe on the core items, that we're maintaining distribution, it was 13% and 14% business. But our objective on Glutino is try and maintain a 10% plus or minus growth rate. The reality is, Udi's is a very hot brand, a very hot brand. And any kind of major new exciting innovation outside of the grocery category is going to probably surface in the marketplace as Udi's, not Glutino. But that said, Glutino is the cornerstone of these gluten-free sets. We're looking at some near end kind of innovation to those categories. It also is probably the place where there's lowest barrier to entry. There are a lot of people that can make a cracker or can make a cookie. It's a heck of a lot harder to make bread and make pizza. So I think it's one that we look at this is a portfolio that we continue to grow the gluten-free portfolio at 25%. On Udi's, there are really 4 big, kind of growth levers that are in early stage. One is club, we're getting full distribution on bread and our bread in Costco, we are testing Udi's pizza in Costco, Udi's granola in Costco, so that's going to be a growth -- incremental growth platform. The food service we just talked about, is certainly a second one. The third is the Frozen Forward strategy. Right now we have 3 pizzas, and by the end of the year, we're going to have 30 items under Udi's in the marketplace. And then the final one is just in-store baked, which we're kind of taking bread from the freezer aisle into the bakery section. And where we actually have accounts about 15% of our accounts sell product now in this in-store bakery, ship it in frozen and they slack it out in the rack. Accounts like Trader Joe's, Whole Foods and many of the Kroger divisions. And those accounts represent about 25% of our bakery business. So we expect this to be incremental, we expect it to be higher velocity. So I think if you look in total for -- I would judge us more totally in terms of our gluten-free strategy, as opposed to any one component because, obviously, we can't lean into everything full power all the time. We have to make some choices, and we think Udi's, really, is the hot hand.

Operator

Your next question will be from the line of Bill Chappell, SunTrust.

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

Just kind of going back, since Jim is on the line. Jim, you had laid out some gross margin goals for Udi's, Glutino, and EVOL back at the analyst day a few months ago. As you're digging deeper into that, any change to the potential what they can do over the next couple of years?

James B. Leighton

No, not really. As a matter of fact, very excited about it, and as Steve mentioned, one of the challenges was to make sure we had the team in place that is going to allow us to execute against that strategy. And we're seeing the benefits of that. So really, no. I'm very pleased with what we're seeing.

Stephen B. Hughes

And one of the things is, going back around to these relationships where you've got real credibility and scale. I mean, the people on the manufacturing side are seeing what's happening in Target and are saying, "Boy, if you could do that in other accounts, that's going to be a significant piece of business." And then -- and I've got a frozen food facility where the declining demand, there's a lot of excess capacity. And Jim had -- we've had one kind of real big win relative to our pizza, where we went out and we started off without a lot of proof of volume. We had a 27% kind of gross margin. Go back now with a proven proposition and a future on that, and the gross margins went from 27%, north of 40%. So I think that, that is a data point that hopefully we can replicate in other categories.

James B. Leighton

And another example I'd use is being out on the road with Phil Anson, the founder of EVOL. He and I have spent a lot of time together, and one of his first co-packers, he was required to pay cash upfront before they'd produce for him. So now we're talking to major league players who are very, very interested in speaking with us concerning producing our products for a couple of reasons. But first and foremost is, they've lost a lot of capacity, especially if they are branded company. And even if they are co-packer, the brands in which they produce, they've lost a lot of the volume there. And the second thing is, they recognize the growth of this company and the alignment we have relative to what they're trying to do.

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

Got it. And Steve, can you just characterize how we should be looking at Rudi's and with its ownership of Hain, I mean, are you seeing -- I mean, do you expect to see them being more aggressive? Would you expect to be displaced anywhere? Or is not really a zero-sum game, as we're looking at kind of the frozen and gluten-free bread aisle over the next, I guess, year-plus?

Stephen B. Hughes

I think, as we look at -- when we just chose not do a pursuit of Rudi's acquisition, it was really based upon 2 things: one is in the frozen category, where we're right now the business primarily in the frozen food section, we knew what we were bringing to that section, in terms of breakfast sandwiches, entrées, burritos and such. And so, we didn't really think we could secure a second brand of bread in the frozen aisle. So that was one data point. The other data point is when we were launching Udi's in-store bake. And that's really where the future of this business is going to be. The reality is, it's physics. We have velocity on Udi's that you can actually ship a frozen product in, slack it out on the rack, have it turn fast it enough, so you don't have lot of sales. Other brands like and Rudi's and Canyon Bakehouse are great brands, but they -- their velocities are 50% of what our velocities are in conventional. So I don't really -- I think we're seeing some very interesting regional folks pop up. We're learning from them. But I think overall, we really think -- we're all about gluten-free all the time. Rudi's is still -- we're going to do over $200 million on Udi's this year. Rudi's is $60 million, $30 million of which is gluten-free. So they're in the mix, but I don't think they're going to be the driving the conversation. I think it's what we're doing with Udi's that's going to drive the conversation with both their significant expansion in the frozen category to other categories, other than bakery, and then really establishing this in-store bake, which, I think, is where the future of this category is going to go.

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

Got it. And then just last one, going back to the core legacy Smart Balance spread. You've been kind of declining the category, I mean trailing the category in terms of declines. Any further thought of the spike going to non-GMO? I mean, do you think that's in part because you pulled some advertising and marketing behind it and the others have stepped up? Or is it just more timing and promotions? Or -- I mean, how we should look at that?

Stephen B. Hughes

Yes, I think there are really a couple of things. One, we did go through a really complete scrub of everything we were spending, whether it was trade events or coupon events. We found that we -- there was a -- we've gotten and trying to drive that business, probably had driven some unprofitable business in the mix, and that's why, while we were down 7% in consumption, we were up 1.4% on the Balance segment. And a lot of that was between gross and net on some of those adjustments. In the most recent quarter, we saw extraordinarily high level of spending from Unilever. They're heading into their space-saver packaging conversion. And so, I think this is somewhat of a short-term thing where they're trying to crank up -- move through that volume before. So I'm not over reacting to the last 12 weeks. I think probably the most, I think, exciting development on our total Balance platform is this top 10 account that has basically said -- I was in a Natural food store -- there was a top-to-top presentation, where this account was carrying -- had 6 Smart Balance SKUs and 2 Earth Balance SKUs. So not a big statement. We average 11 nationally, and they were averaging 8, in total. And this senior executive said, "Boy, I was in a Natural Food store last week, and they had a 4-foot section of Earth Balance, and 12 items. What should I have?" I said, "Well, do you want that consumer?" And they have taken 12 items, and the reason is, as you think of this whole phenomena, where these mainstream retailers are kind of trying to go Natural Foods light as fast as possible, Earth Balance is probably -- is the single strongest brand in any single category, in Natural Foods. We have 95 share in Natural Foods. We have 90 -- we have 100% share in Trader Joe's. And the shopping basket royalty against that product is over $100 per basket, very strong consumer. So I think what's happening with this one account, and we're taking this message regardless of what happens with Smart Balance. And our hope is, is that non-GMO kicks that back into gear. But I think you're going to see us go from 2 to 4 to 5 to 6 items on Earth Balance over the next 2 to -- several years. And I think, quite honestly, Earth Balance sits in a space that isn't the spreads category. It really is viewed as plant-based butter. And so, I think there's -- we're -- as we're kind of in the transition window here, don't really have visibility yet on what non-GMO is going to do for us. But I think we know what our Balance can do for us and I think you'll probably see a shift. If we average 11 items today, 9 Smart Balance, 2 Earth Balance, my ideal scenario is a couple of years from now, we average 12, 13 or 14, but 6 of them are Smart -- Earth Balance, and our sales team is really leaning into that fairly aggressively right now.

Operator

Your next question is from the line of Jon Andersen, William Blair.

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

I apologize if any of these questions have been asked. I just hopped on here. Could you talk just broadly, Steve, a little bit about the gluten-free kind of category or market, the growth that you're -- kind of consumption growth you're seeing now broadly in gluten-free, relative to 1 year ago? I'm just trying to get a sense for kind of the trajectory there and the trends underlying that gluten-free trend.

Stephen B. Hughes

We're seeing some channel shifting, but I think overall, we think the trend is kind of still moving along in that plus 20% range. Carole, do you think that's fair?

Carole Paula Buyers

Yes, to the overall trend of the competitors that we compete against has been pretty steady. With the tough comparisons, our growth has slowed but just moderately. I mean if you think about this quarter alone, we were able to grow gluten-free at 27.5% just in this last 12-week period.

Stephen B. Hughes

Yes. And I think that we're heading to that next step though, where we're seeing club get engaged, we're seeing food service get engaged. And I think, if in fact, some of these major relationships in food service we're talking to restaurant chains we're talking with are our co-branded strategy, that could bode very well coming back in terms of people getting on the trend. The one number that I think is most important, over the last 12 months, 70% of the people who bought gluten-free 1 year ago were buying more this year. I think only like 5% were buying less than last year. So I think that the household penetration continues to grow. I think the buying rate continues to be robust.

James B. Leighton

And Jon, this is Jim Leighton. The other thing we've noticed in -- it's one of the reasons that Steve mentioned earlier that we're so focused on quality because when we are able to get quality right, I think it really drives the trend. And increases lift and velocity for us. And we've seen that time and time again. So we're really focused on making sure that we are at parity or better to conventional products in the gluten-free category.

Stephen B. Hughes

I mean, the Udi's pizza is, we don't talk about it that much because it's kind of in there, but Udi's pizza, we've launched 3 items that were the small format, which is only 30% of total pizza. And we are outperforming the top-selling Amy's gluten-full pizza by 30% on sales per point basis. Well this summer, we're launching the large format pizza. And I think that pizza's going to be very big for us, both in food service and also in retail and that's because it's a great product. It's a great tasting product, it happens to be gluten-free and I think that's where Udi's has been successful. And again, the more experience you get, the more time you get, we can continue to improve these products and really make sure there's absolutely no trade-off to a gluten-full product.

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

Excellent. Just with respect to Udi's, and you may have addressed this, but I know 2 of the initiatives here, you mentioned frozen, the other is in-store baked. Is there an update on kind of progress on the in-store baked side? And is that the same product or is it a longer shelf life formula? Just some more color around that, and the progress, that would be helpful.

Stephen B. Hughes

That initiative, the first account, which is a top 5 account of ours, will ship August 18. It is a variation of the products, it's a part -- for most of you, the important thing is it's a large loaf of bread, all gluten-free loaves tend to be smaller loaves, Udi's included. It's a large loaf. And so, the very -- it's different twist on the products. The branding is basically Udi's Florence Street Bakery. It's got a little less -- it's obviously a brand at Udi's, but it's the look and feel like it does in that bakery section. 25% of all bakery products go in frozen and are slacked out. And this -- so this has got no preservatives. It's basically our Udi's same model, but we've worked -- what's worked in Trader Joe's, Whole Foods, some other Natural retailers and Kroger is essentially a frozen product going in, being slacked out. It turns off the rack in 1 or 2 days, and the consumer has 7 days at home with the product. And you can't -- we couldn't have done this 3 years ago. We wouldn't have had the velocity, because it is all physics. I mean you've got to earn or you're going to have a lot of shrink. And I think we feel pretty bullish that -- and we actually had retailers, when we made presentation, saying, well gosh, I was going to do -- we were going to do this. We're trying to find the baked goods, but we know we have to do this because our bakery is not benefiting from this gluten-free trend.

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

Do you have any targets that you can share in terms of distribution objectives over the next, I don't know, by year end or by the year end next year? Just to help us get a sense for...

Stephen B. Hughes

Now I think, by yearend, we could have either fully -- a full distribution in account or be in an expanded test. We have 1 of our top 5 accounts was going to take 2 of their top divisions and test a couple of variations. But I think we're going to have engagement from probably 50% of our ACV. I would say, by the end of 2015, that we'll probably have this, we could have this at 70% ACV. Certainly, 50% ACV. We do have -- everybody is engaged with it. Some of them -- we have one account that's ready to go systemwide. They're going to do that August 18. We have others that are going to want to try a couple of different approaches to it, and do that in 100 stores, do that -- and then, the other thing is, we're going to take in all the baked goods. I mean, we're looking at cupcakes, we're looking at sheet cakes, we're looking at things you would expect to find in a bakery. So I think there's going to be a really big, incremental play for us, and it's going to secure Udi's long-term leadership position because at the end of the day, bakery is where people buy baked goods, not the frozen food aisle. And I think it's kind of amazing, we created -- our bakery is about $150 million of Udi's business. We've created $150 million in a part of -- section of the store that people have to go find it. So I think this could actually open up household penetration growth and other things for the brand.

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

Absolutely. Last question, just more on from a supply perspective, and maybe this is for Jim. Any updated in terms of -- I think, frozen was an area where you've been going through some evaluations on how you want to kind of support the growth there, whether it be through expanded co-packer relationships or investment in internal capacity. Any update there, just in terms of your approach and ability to support the growth in the frozen business going forward?

James B. Leighton

Yes, internally, when we acquired EVOL in December of last year, they were running 1 shift in that facility, we've recently -- as recently as a couple of weeks ago, received approval from USDA to expand that facility both for FDA products, as well as USDA products, a second shift. As a matter of fact, I was out on the road with Phil Anson over the last few weeks and we were jokingly talking to people. We're walking through these massive facilities, hundreds of thousands of square feet and we challenged them that we probably have the highest revenue per square foot facility in Boulder -- of anywhere in the nation. Externally, and as I mentioned earlier, our conversations have done very well. And we've been very well received across the entire portfolio of frozen products. So we're just now getting bid packages out, and we're starting to receive pricing back in. So we'll have a lot more we can share with you in -- at the end of Q3.

Operator

Your next question will be from the line of Andrew Wolf, BB&T Capital Markets.

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

On Smart Balance, the non-GMO relaunch or however, I know it's early, but do you have any anecdotal feel for that in terms of velocity changes versus the SKUs that were -- that they replaced?

Stephen B. Hughes

I think, it would be -- we've got some data points from one of our large customers we get weekly data on, that it's headed in the right direction, but it's still way too early to sit there and say, this is going to change a trend. It's also in the backdrop of what we've seen as a fairly extraordinary step up in spending on Unilever because they're getting -- as they begin to move in to their fall conversion to the space saver packaging. And Carole, do you have any thoughts on the -- some of the spending -- competitive spending, which just kind muddy in the water right now...

Carole Paula Buyers

Yes, when you look at the Nielsen data for the last 12 weeks, the competition outperformed us. But that's not as a grand scale. But to Steve's point, when you dig down deeper, we are seeing some indications of hope on non-GMO helping the trend overall. But just too early to say, Andy. I think -- we said when we started this initiative, this is the right thing to do for our company. And so, we're excited about non-GMO. The point of difference on the shelf, it's all about a point of difference for us. It's not about spending on trade to promote it. We're getting out of that game. We're trying to make it more about a point of difference, not about promotion. Our competition at the same time, is that we have a point of difference, they're going in with price. The other thing is, from a marketing standpoint, we're not marketing it until June. June -- actually, July 1, was the first date where you'll start to see it tagged...

Stephen B. Hughes

July 1 was the first...

Christine Sacco

Was the first day where you'll start to see it tagged on shelf and the point of different stand out.

Stephen B. Hughes

And I think the benefit on this -- I'm not too sure this is going to spike the first purchase off the shelf. I think what's going to happen is people get this home, it's in their home for 4 to 6 weeks. I think it's going to make the second purchase stickier. And maybe, increase our royalty on that on repurchase, which has been, over the last couple of years, has been kind of pretty fragile relationship where they're kind of buying on price depending on who's being promoted. So I think that we get through this purchase cycle. I think by September, October, we should have a much clearer indication. I think there are really 2 plays that are on our spreads business. Plan A is non-GMO works, and we take Earth Balance to 6 items. Plan B is non-GMO doesn't impact Smart Balance trends and we take Earth Balance to 6 items. I think the potential for us to have a significant move on Earth Balance and a long-term growth proposition, because it's not a spread. I mean, the spread category that Smart Balance plays in is a 60% oil kind of -- or less category, you can't use it for baking. Earth Balance is 80% oil, just like butter. It performs like butter, it is like butter. And you look at some of these other plant-based categories, take for example, White Wave, where they've got the plant-based milk essentially -- hell of a business for them. I think from our standpoint, we can carve that. As butter comes back into vogue, everybody is going to need a plant-based butter. And I think that, that's a place where we could really bring some long-term growth back to our combined Earth Balance, Smart Balance Spreads portfolio.

Carole Paula Buyers

And then one last point on non-GMO too, I mean the press is also willing to drive the awareness of non-GMO, as a political issue, and it's kind of a state-by-state initiative. And we're seeing it percolate and hopefully...

Stephen B. Hughes

In Colorado, or in the balance for this fall. So that will -- that will keep the vibration going. I'd still think this non-GMO thing has been a tripwire for the entire mainstream, large-cap's, food businesses. I think this is -- their partnering with Monsanto and DuPont to prevent try to beat back these labelling initiatives has beyond non-GMO, I think it raises the fundamental question of consumers are now asking, what the hell is in my food? I mean if these large CPG companies are partnering with Monsanto and DuPont, to keep itself off the label, that they know I want to have on the label. That doesn't build a lot of trust in those legacy brands. And I think that's one of the things that's feeding them, their declines and thus, feeding the focus of the large retailers to go whole food -- to go Natural Foods light pretty quickly. I mean, I think it's got bode pretty well for White Wave, or Annie's, or Hain, and for us, because there aren't that many large players for these large retailers to partner with. And so I think it's going to be very, very good. And I finally said, I was talking -- we were having a conversation today with a -- we had a board call on and I said, I really think what you're looking at the next 3 years in the food industry is Armageddon. If you are a large-cap legacy-branded company, you're on the wrong side of history. And it's going to play out -- it's been playing out from a consumer standpoint. So they've had this decline. I think you're going to see much more fundamental changes now because the retailers are taking action. They're going to cut space to those legacy-branded brands and to the extent that they're going to lean in on an emerging brand like EVOL the way these retailers are, or Udi's, or Amy's, or Annie's. I mean, I think, it's going to be really remarkable and I think it's going to be really remarkable what happens the next 3 years in the transition of mainstream grocery.

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

I think it's interesting -- what you're saying is going to be really interesting to see. And since this product is one of the first mainstream products that took a non-GMO stand, it's interesting, as you're discussing globally, not just for your company. But could you just amplify a little bit about what you're going to do with the shelf talkers or what have you? And in July, that for the point of difference.

Stephen B. Hughes

But we're going to have -- I think we have something like 70% of the weeks between now and the end of the year, we're going to have shelf talkers on the shelf. We have a very aggressive social marketing digital program going in concert with this. So again, it's -- it will probably be a gradual change in -- change, as it comes, but I think it's -- these shelf lives are very impactful. And now -- and we're also -- one of the things we're going to be doing, probably not 'til October, is we're going to be actually looking to even further increase the non-GMO leaf that we have in the package. But again, overall, I think we feel patience. The nice thing is, simultaneously, as this is happening, we're going to have a pretty interesting proof-of-concept test on what happens when a mainstream retailer goes from 2 to 12 Earth Balance items. And I think that will help inform what we -- how we approach 2015.

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

And just one last thing, Steve, because I just want to make sure I heard you right. Did you say in-store bakery? Or did you say in-store bakery or in-store baking is going to be where the next growth leg of gluten-free?

Stephen B. Hughes

Well, right now, there isn't gluten-free broadly in the bakery section. It is in Natural, it is at Trader Joe's, but -- and to some extent, with Udi's, with Kroger. But it really, basically, is we're going to ship the product in frozen, it's going to go from the freezer to the rack, and fall, and the velocity is such that it will turn 1 or 2 days, 3 days, and the consumer's going to have the time at home. That's what's proven out in the places that have already tested this. But the thing that is interesting that I didn't know is 25% of everything you see in the bakery section arrives in the store frozen, just slacked out. Those bakeries in those stores are not that big, in terms of -- so they do certain items, but they fill in with the specialty items typically come in from -- as a frozen product that get slacked out.

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

All right. I just wanted to make sure I heard that. So you're not saying parboiled product egg gets baked fresh? And lastly, in food -- just want to talk about food service and the issues of contamination, cross-contamination. Sort of slowed, pizza folks trying to sell the product and so forth. Could you just talk a little bit about what you're working on in regard -- in related to make sure that people with celiac's disease don't get sick?

Stephen B. Hughes

Well, there's going to be -- I think there's going to be -- each retail -- each restaurant chain is going to do a bit differently. In some cases, people are going to say, listen, this a gluten-free pizza crust, but I can't guarantee it's under 20 parts per million because there's not any -- there's cross-contamination. And that will serve everyone except the most celiac or the most sensitive. So I think each one is working through it. I mean, some of them are approaching -- okay, how do I ensure from an in-store process standpoint, 20 parts per million or less? Others are saying, "How can I just offer a gluten-free English muffin on my breakfast sandwich, and not promise it to be 20 -- under 20 parts per million?" And a lot of -- if you go to a lot of pizza chains today, I mean the economics of this are pretty interesting, because they're up-charging the pizza -- the gluten-free pizza crust $1, $2, $3, per pizza crust -- per pizza. And they're saying, this is gluten-free pizza crust, but it's being cooked in a gluten-full oven. So each restaurant is dealing with it differently. Each chain is dealing with it differently. And we're providing kind of our expertise in this, but they ultimately have to decide. If they really want to go and guarantee 20 parts per million, that requires a level of control and discipline that they need to be -- embrace because they -- changing things in those restaurants, across 1,000, 2,000, 3,000 restaurants is challenging. We also have some that are looking for just a prepackaged product that they can offer as an alternative.

James B. Leighton

The other thing -- Andrew, this is Jim Leighton. The other thing we're working on is a unique and potentially proprietary packaging and process to provide, say, pizza to an operator that would get it to the consumer in a way that would remain under 10 parts per million. So it's a -- matter of fact, I sampled some of that product yesterday, and we're getting very close.

Stephen B. Hughes

It's kind of a bake-in-bag contain -- contained, so it goes in and never gets exposed to the -- in the kitchen or in the oven.

Operator

Your next question will be from the line of Mitch Pinheiro, Imperial Capital.

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

A couple of quick questions. First, on the 27% growth in your gluten-free brands, I mean what's the breakdown between like distribution gains and just pure consumption?

Stephen B. Hughes

I think it's still running about 50-50. I think, the split is still running about 50-50 to growth in terms of distribution build out and velocity on gluten-free.

Carole Paula Buyers

It depends on the brand. So Glutino is more on velocity than distribution and then Udi's is more on distribution than velocity, just because of the -- just where they are, filling in the white space.

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

And when the category -- when your comps get tougher and things slow down a touch, where is it going to slow down? Is it going to slow down on your distribution gains? Or on the consumption side?

Stephen B. Hughes

We have such a robust pipeline on innovation between the frozen and the in-store bake. I think we've got some pretty good runway on the distribution build. And I still think the underlying trend here, we're seeing the underlying trend of the category, of the brands we track are still running plus 20%. So I think it's -- we don't really see -- we see a pretty clear road to an innovation pipeline that's going to continue to have us building quarter on quarter, our footprint.

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

And then, just a detail question on your -- the in-store bakery, are the prices of in-store and frozen loaves going to be the same?

Stephen B. Hughes

They're going to be approximately the same. The loaf is larger. It's a large, more traditional sized loaf. But it's going to be comparable of, we think. And then again, we've got the 2 -- the 2 breads, the white and the whole and the multigrain. But then we have things like cupcakes and cookies and brownie bites and such. So it's in the zone of our pricing. We think it's a pretty -- if we can execute it effectively and broadly in the next 12 months, we think it's a -- it really is a great new dimension for that bakery platform.

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

Okay. And just last question. When I look at the frozen category with EVOL and with -- there's a lot of -- there's a lot of brands out there. I mean, obviously, you've named the leading ones whether it's Amy's or Annie's, but there's a lot of sub-brands that have space and I was wondering if you could talk about whether any of these -- whether you have scale that you can bring to some of these smaller brands now? Or there are -- whether there are categories within the frozen that you might be interested in acquiring. So is acquisition growth, in the frozen side, part of the plan? And if you could color that, that would be helpful.

Stephen B. Hughes

No, I think -- I wouldn't rule it out, but I think at this point, we think the EVOL brand and the Udi's brand can really touch all categories. I mean it's pretty amazing. I mean, I, even -- we bring Phil and his team in and go fast, go faster. But we're in pizza. We're in burritos. We've just launched in the breakfast sandwiches. We're in the bowls. We're in the skillet meals. I mean, we're really in all the major formats right now with those 2 brands. Now -- and we think we can bring ethnicity, different ethnic approaches into EVOL -- I mean, we've got -- they’ve just launched the Sriracha chicken. I mean it's really pushing the envelope on flavor profiles. So we don't necessarily have a brand that stands for Thai. Down the road, maybe that would be different. But I think our frozen strategy, once we get the co-packing network lined up, our co-packing -- our frozen strategy, we could go -- I mean by January, we will be selling 75 frozen items between EVOL and Udi's. I mean, that's a heck of a footprint. And I think there's a lot more innovation behind that.

Carole Paula Buyers

And I would add, on a business development standpoint, we're probably more likely to take this frozen strategy to Earth Balance before we feel like we need to make an acquisition of another brand because when you think about the elasticity of all of our brands, and what they represent, EVOL is pure and simple. You think of Udi's as fully gluten-free and then you have Earth Balance as that opportunity to kind of expand into more of the vegetarian or Vegan space.

Stephen B. Hughes

Yes. I mean, near-term though, I think what retail is going to do, it's going to be a door or 2 of Amy's, a door or 2 of EVOL, a door or 2 of Udi's. I think we're, quickly, kind of, becoming an alternative -- a complement to Amy's. And I think retailers are thrilled because one of the biggest issues why Amy's only been the biggest only real Natural frozen food brand that's really crossed here in a meaningful way is, I mean frozen is hard. And scale is essential. And I think what we saw when we looked at EVOL with what they knew was coming at Target, we said, "Boy, that's a heck of a proof of concept. If that works, that will work everywhere." And obviously, it's kind of exceeded our expectations, and I think we can see -- we're going to see continued distribution buildout there, but we've got -- now have a real data point when you take out the retailers. Because when you're the #10 brand, I mean, we lost Healthy Choice in '88. And it took us 4 years to get real big -- real kind of scale on an account that would be comparable to what we've gotten with Target with EVOL in the last 6 months. So it's a good proof-of-concept. I think we have a lot of runway here at those 2 brands, and to Carole's point, Amy's is a great brand, but could Earth Balance be a player in that Vegan space with a little bit more contemporary flavor and offerings kind of taking a page out of the EVOL book and make it -- and give it a little bit different twist. But I don't think acquisition will be necessary in frozen.

Operator

The next question will be from the line of Akshay Jagdale, KeyBanc.

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

I just wanted to ask about the gross margin bridge. So this quarter came in a little bit lighter than what we were expecting and there's a pretty significant recovery that you're baking into your guidance, no pun intended. So can you talk a little bit about -- just help us bridge the gap from now to fourth quarter, 41%, what's going to drive that? And what's changed? Because this quarter did come in a little bit lighter.

Christine Sacco

Akshay, this is Chris. So the 400 basis points we've got in for first half versus second half is really going to be driven by 3 things. The first and the majority, so more than half of the basis point improvement is going to come from our reduction of inefficient trade spend. The conventional promotion pricing model just not working. We're going to move to fewer, bigger, better events. We've had reformulations with our Udi's bakery products that have been proved -- product improved performance. And in connection with the egg white movement, we've also taken price on Udi's bakery items. That will kick in, in the third quarter. And then just the continuous margin improvement, which is of the 3 initiatives contributing the least to the margin improvement. But there are -- I mean, every day there's a new item on that project challenge place.

James B. Leighton

[indiscernible] of accelerating.

Stephen B. Hughes

But we also had -- I mean we -- a lot of this happened, began to happen in the second quarter, just in getting to inventory, we saw our gross margin sequentially improve from May to June, about 200 basis points. So we think we're -- we think it's going to happen. And the trade is -- the trade issue is very interesting. I mean, we buy these Natural food brands and they all have 10%, 12% trade spending and they're buying a lot -- there's spending a lot of that on TPRs, temporary price reductions. We've done the work on that, and that's like completely ineffective, very little lift, just really kind of subsidizes retailer profitability on every day -- almost every day sales. So we're converting those to bigger, better events. And we've got a couple of things coming up that are really getting to be serious kind of -- promotional kind of opportunities. We've got one account that's doing a major event on pizza, that the order is going to be like 42,000 cases. I mean that's going to drive incredible household penetration. We have, on EVOL, skillet meals on account that's going to kick that off with 17,000 cases of short order. We have a new product that we're going to be able to talk about in the third quarter that's going in and the initial order was 60,000 cases, for a promotional focus. So what we're doing is trying to shift to things that when they happen, we think we really can drive household penetration materially for the brand. We also should have a very strong celiac awareness month. We have a pallet program that's going to be tested in a couple of accounts. Accounts like Kroger are going to have very extensive pallet programs. So what we're trying to do is get those dollars to really where they move the needle relative to household penetration or buying rate. And we found that there's just a lot of money we were spending that was really not going through to the consumer, and that's what's really driving more -- driving household penetration.

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

Okay. And then, as we look at the growth rates for your Natural brands longer-term, I guess, the way I'm reading what you've said so far is, the category is growing at 20%. Your shipments growth have generally been growing above the sell-through data. But over time, I mean, is it just -- is it a good way to think about long-term growth for your brands around 20% growth, as you look at it today? I mean, eventually, things will slow down, and is 20% the good, conservative estimate at present longer-term for these...

Stephen B. Hughes

Well I think we -- I think we're not prepared to give kind of 2015 guidance right now. We kind of have been pretty specific about back half. We've said 10% to 15% organic growth for the company long term. We do have some pretty dynamic, major new dimensions in strategy, whether that's in-store bake or frozen. But we'll be able to provide an updated view versus our 10% to 15% growth stated objective on our third quarter call when we give our 2015 preliminary guidance.

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

Perfect. And just a follow-up on the trade promotions that you talked about, the efficiencies. So basically, you're reducing the amount you're spending, but the impact on growth, it's not going to have a materially negative impact on growth, is that the best way to think about it?

Stephen B. Hughes

Exactly. And I think colossally, if we do this right, and we get better and better at these big events -- when you take a product line like Udi's, it's got 2% household penetration. And you have a major 2-week event where you're going to sell 40,000 cases of pizza, that likely is going to spike household penetration. So that's what we're trying to focus on. Because still, I mean -- we're still on Udi's and Glutino being around 2% household penetration for example. I mean, EVOL probably is below 1% household penetration. The opportunity to get the lever fewer, bigger events, that really do get a lot of trial is kind of what we're focusing on. And we also found -- I mean, when you do a 15% to 20% temporary price reduction on Glutino pretzels, the lift was only 10%, 15%. It wasn't -- nowhere did it come close to paying for itself. So I think we're getting smarter, and we're starting to try to develop it the Boulder Brands way, as we look at acquiring future brands. What's the crossover model? How do we address -- how do you really focus those dollars to drive the best consumer engagement, not necessarily -- because a lot of these emerging brands, they get trapped in the zone where they get trade programs that are as much to help them maintain distribution as it is to drive the business. And we kept things like in EVOL brand, while it was only $17 million last year, we saw obviously something quite bigger. We now have real leverage to put together programs that are compelling to the retailer, but are going to drive big incremental trial.

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

So it's -- on the promotion side, again, it's just a -- it's a strategic change. You're not changing anything with the people who are managing the trade spend or the actual systems itself? Or is it a combination of all of those?

Stephen B. Hughes

No it's just really realizing that, unless you're going to get a big event off-shelf display and kind of major kind of -- suddenly lose major volume, but not that versus the other alternative is -- these 2-week or 4-week temporary price reductions. Really completed as the temporary price reductions really in these categories are irrelevant, and don't drive -- and we were probably spending 50% to 70% of our dollars against temporary price reductions, so we're shifting that to really fewer, bigger, better events.

Operator

Final question will be coming from the line of Chris Krueger, Lake Street Capital Markets.

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

I know when you acquired EVOL 7 months ago, it was primarily sold in Target stores. And here in Minnesota, I've noticed, just in the last 5 or 6 weeks, that a regional grocery chain has taken on the product. And I counted, I think, 32 SKUs. Just wondering how many, like doors have been added since the acquisition or an ACV percent or any kind of help there?

Stephen B. Hughes

I think in the first half, it's been more setting the stage. I think what you're going to see here in the second half, I think our top 10 accounts, every account, will engage on EVOL. It might be just taking the single-serve entrees to start taking the 7 or 8 items there. But we do have a number of our top 10 retailers that are taking -- we have one, in addition to Target, that took 40. We have another one, I mean, Schnucks in St. Louis, not a huge account, but took 29. We're starting to get that kind. And then a lot of it is, in some cases, you have to sell 5 different buyers. There's a pizza buyer. There's a breakfast buyer. There's a -- and then resets are all different. So it'll be a little ragged. There are a couple of accounts who said, "No no, no, I want this." And they cut across the buying strategy and said, "I want to take it all right now and make a big statement." So I think, by yearend, we're going to have EVOL -- in certainly the top 10 accounts or in the top 20 accounts, and it could be anywhere from taking a first step of 6 items, to accounts that are going to take the full lineup.

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

Okay. And then, on Level Life, I know that, that began at Target as well. Can you remind us how many other chains are currently selling it or about to sell those products?

Stephen B. Hughes

I mean Target -- Walmart has come in. Walgreen's has come in. A number of Kroger, Ahold, they've all come in, so they're resetting now. We're starting our kind of customer base activation programs over the next several months. And I think that there's a real belief, that there's a need for a new dimension for these accounts. The reality is, this product is sold in the pharmacy section. So it's a slow-turn category, and I think one of the key indicators we're looking for is, are we're going to see some spontaneous combustion here, or after we get the first round of trial programs from the retailer, are we going to see nice, ongoing business. So we're cautiously optimistic. The team has done a great job. They've got some nice exciting new products in the pipeline, but we want to kind of see how the bars and shakes and gels take off first. One that we haven't talked about, which I really am encouraged by is the progress we've made in the U.K. The U.K. has been -- was an investment the last 12 months, but that team has achieved tremendous credibility with the leading retailers. And we now are going to be able to stop importing product, and I think we're expecting that business to be profitable in the fourth quarter. But we have a great team over there, and they've worked tirelessly. But I think -- when I was over there a couple of months ago, the interesting thing is, the questions and the energy and the intensity, the Tesco, Asda and Sainsbury, have for getting Natural Foods light quickly, just the same as you're seeing from Target, Walmart, Kroger, Safeway. I think this is a trend we're going to benefit from obviously in North America, but I think also in the U.K. as well.

Operator

At this time, we have no further questions in queue. I'd like to turn the call back over to Mr. Steve Hughes, for any closing remarks.

Stephen B. Hughes

Well, I just appreciate you all taking the time. I know it's a busy earnings day, but we're pleased to have the first half behind us because we have a lot to look forward to in the second half. So thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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