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Executives

Carole Buyers – SVP, IR and Business Development

Steve Hughes – Chairman and CEO

Chris Sacco – CFO and Treasurer

Analysts

Scott Van Winkle – Canaccord

Jon Andersen – William Blair

Andrew Wolf – BB&T Capital

Mitchell Pinheiro – Janney Capital

Chris Krueger – Northland Capital

Amit Sharma – BMO Capital Markets

Akshay Jagdale – KeyBanc Capital

Smart Balance, Inc. (SMBL) Q2 2012 Earnings Call August 2, 2012 9:30 AM ET

Operator

Good morning, my name is Kevin. I will be your conference operator today. It’s August 2 and I welcome you to the Smart Balance 2012 Second Quarter Conference Call and Audio Webcast. This call is being recorded for playback purposes and will be available beginning two hours after the conclusion of today’s call. The playback will be available through August 16, 2012. The number for the replay is 1800-753-5479, you may also listen to the broadcast by logging into www.smartbalance.com. and in the Investor Center clicking on the link. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions)

Some of the statements we’ll make on this conference call including statements about the company’s plans, strategies, beliefs and expectations are forward-looking and subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ material from what is expressed in those forward-looking statements for a number of reasons including those risks and uncertainties disclosed in the company’s filing with the SEC and in its earnings release.

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

Carole Buyers

Thank you, Kevin and good morning everyone. With me today are Steve Hughes, our Chairman and CEO and Chris Sacco, our CFO and Treasurer. Earlier this morning, we issued our second quarter earnings release. If you have not seen the press release, its available on the investor center page of our website at www.smartbalance.com.

The company uses the terms cash operating income and net income and earnings per share, excluding non-cash and certain items as a non-GAAP measure. The company believes that these measures better explain its profitability and performance consistent with the way the investor’s and security analyst evaluate our company in a competitive environment in which we operate.

Cash operating income is defined as operating income excluding stock-based compensation expense, depreciation and amortization and acquisition and integration related costs. In addition the company uses the term adjusted EBITDA, when referring to Udi’s as management believes that this measure better explains the acquired company’s profitability and performance consistent with the way the investor and security analysts evaluate the performance in the competitive environment in which we operate.

Adjusted EBITDA is defined as operating income or net income excluding interest, taxes, depreciation amortization and other non-cash and one-time items. The company believes that the exclusion of both non-cash and certain items provide a better reflection of the operating profitability of the company and strongly complement the company’s planning and forecasting models used in providing investor and security analyst with important supplemental information regarding the company’s underlying profitability and operating performance.

Finally, the company uses the term cash EPS which is defined as GAAP EPS plus incremental

amortization of intangibles and depreciation related to the Udi’s transaction.

However, non-GAAP financial measures to 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 views may differ from the non-GAAP measures used by other companies. We have included in our press release reconciliations of cash operating income to operating income and of net income and EPS excluding non-cash and certain items to net income and EPS in each case as calculated in accordance with GAAP.

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

Steve Hughes

Thank you, Carol and good morning everyone. Let me provide you the agenda for our call this morning. I’ll begin with a high level highlights for our second quarter results, as well as some specifics on our retail and consumer activity in the quarter.

Chris will then review the second quarter financials, our raised outlook for 2012 and a preliminary outlook for 2013. I’ll then close the call with a review of what look forward to in this back half of 2012, and then take questions. With that, onto the quarter, second quarter results.

We’re pleased with our second quarter results which were in line with our expectations and continue to reflect the impact of our key strategies. Let me review the quarter by highlighting with our key strategies accomplishments. First with our natural growth platform, Glutino and Earth Balance both at strong quarters. A quick comment on Glutino.

Glutino is at a store takeaway remains strong at 31% growth on average for the last 12 weeks period, ending July 7.

Our net sales were just strong at plus 31%. As we completed the transition in our promotional strategy from (inaudible) performance base, inventory to distributors have balanced and order patterns have begun to track retail sales.

We’re approaching the one year anniversary since acquiring Glutino and the work our financial, operations, sales and marketing teams have done on integration, initial changes at Glutino are making good strives. Couple of highlights for the second quarter.

From a sales perspective, the focus is on growing distribution in all three key customer channels, natural grocery and mass in the U.S. and Canada leveraging our strong top relationship. We’re keenly focused on increasing the number of Glutino items, we sell in the conventional channel, which consist of U.S., grocery and mass. A top to top meetings with retailers are intended to establish Glutino as the proven destination grocery brand for the Glutino free shopper. In turn, we’re presenting a merchandizing strategy that focuses on a dedicated Glutino free grocery shelf, anchored by Glutino.

So to embark our distribution drive with Glutino to build on the 8.4 items we average nationally based on Nielsen, over the past six months, we’ve secured 150 incremental items with 20 retail accounts. This is a great outcome from our first round of top of top meetings, most of this distribution will actually begin shipping in Q3 and we expect the number of items we’re averaging nationally to increase approximately 10 items by the of 2012.

From an operational view, we are, we also started production on Pretzels in the US. The Pretzels were previously manufactured overseas. We expect this project to increase gross profit, margins on our Pretzels. In Q2 we also completed the upgrades in consolidating from three buildings to one in Montréal. This project will contribute to improve gross margins in the second half of 2012 and we believe we are on track to significantly improve brand gross profits in 2013.

Moving to our second growth platform Earth Balance. After Gluten-Free one of the most powerful emerging trends in food is around the benefits of the plant-based diet. And Earth Balance is perfectly positioned to capitalize on this trend across all channels. In turn we see, we’re seeing, continue to see impressive results from our Earth Balance branded detail.

Earth Balance continues to perform well with the strong net sales gain or plus 27%, posting strong results for spreads, soymilks, mayo and nut butters across all sales channels.

In the conventional channel we once again delivered strong performance in the 12 week, sales growth in access of 16%, as the team continues to leverage strong natural product trends by expanding distribution of this very successful brand.

In the natural and whole foods channel, we’re most developed channels. Earth Balance total brand retail sales increased by 23% for the 12 week periods ending Q2, driven primarily by our new product launches such as MindfulMayo, Organic Coconut

Spread and Earth Balance Coconut & Peanut butter. A brief update on Udi’s in Q2. While we closed Udi’s on July 2, therefore is not reflected in our reported numbers, I’d like to note that Udi’s had an exceptionally strong quarter.

Net sales of $23.9 million represented 80% year-over-year increase and adjusted EBITDA was $3.5 million, for an adjusted EBITDA margin of 15.5%. Based on the adjusted EBITDA run rate basis of $14 million and our effective purchase price of $104 million, which includes the future cash tax benefits due to the acquisition being treated as an asset purchase. We paid 7.4 times multiple based on the earning power in the quarter we acquired the business. Again we expect Udi’s to continue the growth and have identified cost synergies of approximately $2 million to $3 million, before related cost to achieve, we believe our purchase of Udi’s represent an excellent value before considering the unique strategic value in combining with Glutino.

Quite simply this business is driving exceptional momentum and strong margins. After Chris provides the financials and outlook, I will spend a few minutes outlining with what in the back half of 2012, include more Udi’s at that point.

Moving to Smart balance milk. Mostly as expected milk was soft this quarter with a net sales decline of 9.8%. Any of the difficult comparison to last year from a promotional standpoint the impact of our volume growth, but on a wider gap in conventional commodity selling prices, which dropped sharply as expected in the quarter and also contributed to comparison. As it relates to milk the good news is milk competitors have since increased prices and buying comparisons the last year will ease in Q3.

In addition three of our milks now contain the American Heart Association check mark for meeting the health standards and is on our packaging. I’ll touch a little bit more on back half for milk in my closing comments.

Finally, let me talk about the strategy which we call hold the line in Smart Balance core spreads in grocery. As I mentioned over the past two quarters, our core spreads in grocery business generated significant amount of profit and cash for the company.

In the current continuing tough economic environment, our focus is to manage these businesses for consistent profits, while launching a new dimension to our core business, Smart balance Spreadable Butter, whereas we call Better Butter.

In the quarter, we are able to hold the line in profits with our core spreads in grocery year-over-year. Sales are relatively flat with a modest increases in Smart Balance spreads. The incremental benefit for Spreadable Better, growth in grocery offset by the wind down of Bestlife. Yet we were able to deliver a modest profit growth year-over-year excluding the investment in Spreadable Butter for our core spreads in grocery business in line with our plan.

We are very encouraged in the, with the initial success of Spreadable Butter with an estimated 80% of the volume incremental to our franchise, it appears this initiative has the potential to source significant volume from the butter category, adding an important dimension to our most profitable business. Initial results including trial and early repeat purchased data give us confidence we can strategically hold a line in our core spreads in grocery strategy and category and grow market share in the premium butter and spreads category.

Smart Balance Spreadable Butter started shipping nationally on February 27 with three new items. We started national marketing support on May 1. Today, we have broad distribution with approximately 72% ACV and almost two items on average on shelf. Over the past 12 weeks ending July 7 we gained a 11% market share in the Spreadable Butter category. For the most recent four weeks, we are at 14% market share in the Spreadable category. Importantly, the Spreadable Butter segment grew over 30% in the 12 to 4 week periods, with all brands growing indicating that Smart Balance Spreadable Butter is actually accelerating segment growth.

Our focus on premium spreads and butter is beginning to come to life. Recall the last quarter, we began to provide you with consumption trends that were reflective of our premium spreads in butter business strategy. In order to do so, we began a more targeted focus on the premium segment trends of spreads with Earth Balance and Smart Balance and expanded our view to include the premium segment of butter, the Smart Balance Spreadable Butter. This may we can better reflect our performance in the competitive set in which we market and merchandise our products and the premium consumer segments we compete.

Let me review the Nielsen data for 12 week period ending July 7. For our premium spreads and better strategy, which includes Smart Balance spreads, Earth Balance and our new Spreadable Butter. In July 12, in the 12-week period ending July 7, our premium brands outperformed the segment and were flattened hours with a 1% unit increase. Our dollar share in this premium segment actually increased the share point to $25.1. As for the grocery business they performed well in the same period increasing $4.16 during the 12-week period driven by strong price in the Peanut Butter, Cooking Oil and the cooking oil categories.

Now with that, let me turn the call over to Chris. Chris?

Chris Sacco

Thanks, Steve. Good morning, everyone. Turning to our financial results, second quarter net sales increased 28.7% to $76 million, compared to net sales of $59 million in the same period last year. A number of positive factors impacted our net sales.

Glutino represented $15.9 million of our net sales or approximately 28 points of the consolidated net sales growth. In isolation when compared to the same period last year, Glutino’s net sales increased 31% in the period. As expected the impact on sales from the structure of our promotions with distributors has stabilized and consumption and shipments are now in balance.

Pricing had a net positive impact in the quarter. Finally, our base business excluding Glutino increased modestly at 1%. This was the result of strong sales growth in Earth Balance, flat sales in our core spreads and grocery businesses offset by a decline in milk.

Gross profit dollars increased to $32 million from $28.2 million, primarily reflecting the inclusion of Glutino’s results, as well as the net impact of higher selling prices which more than offset the impact of higher commodity costs and lower volumes in our base business. Gross profit as a percentage of net sales was 42.1% in the second quarter, compared to 47.7% in Q2 last year. As expected, the mix impact from lower average gross margins of Glutino and the introduction of Spreadable Butter mostly contributed to the 560 basis point decline in margin.

As we look out to the rest of the year and I stated in our last conference call, we still expect the gross margin in the back half of the year to be higher than the first half of the year. Operating income decreased to $6 million in Q2 excluding acquisition and integration related costs of $1.7 million, versus $7.4 million last year.

Higher depreciation amortization and stock compensation expense negatively impacted Q2, 2012 operating income by approximately $2 million, when compared to last year’s quarter. In addition, this quarter we invested approximately $2 million in spending for Spreadable Butter.

Cash operating income increased 5.3% to $10.9 million in the second quarter, compared to $10.3 million in the prior year’s quarter. Net income in Q2 was $2.9 million or $0.05, per share, compared with net income of $3.9 million or $0.07 per share in last year’s quarter, excluding the previously mentioned items and the net tax impact in the second quarters of 2012 and 2011 of reducing the company’s deferred tax assets related to certain stock option forfeitures.

Now let me provide some balance sheet specifics for the quarter. We ended Q2 with $103 million in funded bank debt. Taking cash into account, our net debt at the end of the quarter was $91.9 million. On July 2, we closed the Udi’s transaction and reported our net debt with approximately $237 million, resulting from an adjusted purchase price of approximately $126 million and fees associated with the transaction. Capital spending in the quarter was $700,000, compared to $800,000 in the year ago quarter.

Moving to our full year 2012 outlook. We’re reaffirming our outlook for our base business and increasing amount provided to include Udi’s for the second half of 2012. For 2012, the company expects net sales in the $360 million to $370 million range, gross margins in the 42% to 44% range and cash operating income in the $53 million to $55 million range.

This compares to our previous 2012 outlook of sales in the $320 million to $330 million range, gross margins in the 42% to 44% range, and cash operating income in the $46 million to $48 million range.

Some other specifics as it relates to 2012. The company expects interest expense to be approximately $14 million, stock-based compensation expense to be approximately $9 million, and depreciation and amortization to be approximately $14 million.

For 2013, we’re providing a preliminary outlook. We expect sales to be in the range of $440 million to $450 million; and cash operating income to be in the range of $70 million to $75 million. We will be providing more specifics on our third quarter call. With respect to Udi’s accretion expectations, we expect the transaction will be accretive on a cash EPS basis for 2012 and 2013, while we expect the transaction to be slightly dilutive on a GAAP EPS basis for 2012, we expect that will be GAAP EPS accretive in 2013.

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

Steve Hughes

Thanks, Chris. Let me wrap our call and say that we lookout to the remainder of 2012 and there’s a lot to look forward to. We’ll driving our Natural Growth platforms, Earth Balance, Glutino and Udi’s and focus on attaining profitability in Smart Balance note. As we hold the line on profit contribution for our core spreads, grocery business as we benefit from the successful launch of Smart Balance, spreadable butter. First of the acquisition of Udi’s and a combination of Glutino and Earth Balance.

We’re now offering premium equities through the most powerful emerging food trends in Gluten-Free and plant-based diet. So it’s a strong hand. Net sales performance in Q2 sums it all up. Earth Balance is up 27%, Glutino was up 31% and Udi’s was up 80%.

Our natural brands portfolio grew plus 50% in Q2 achieving an annual run rate of $188 million net sales.

First the Earth Balance, we expect Earth Balance to continue at strong momentum in the 2012 as the brand will benefit from recent product introductions and additional distribution gains in the grocery and supercenter channel. In addition, we’ll be launching several new products in the second half.

Second, the power of combining Udi’s and Glutino will create a unique competitive advantage and we believe in time, many mainstream retailers will look us as a strategic partner in category capital.

In July, we made several combined top to top customer presentations, the combined strength of Udi’s and Glutino is evidence. This going to be a very powerful combination. Retailers are looking for a strategic partner to address the Gluten-Free trend and combination will enable us to provide consumers with a two tier brand solution and with a comprehensive portfolio of great tasty products.

Let me review Glutino annuities in more detail for the second half. On Glutino, first priority is product placement. Our top to top meetings in the first half should result in consumption and sales acceleration in the back half of the year. This will benefit from additional distribution of SKUs and ACB games. When Glutino product renovation will completed – we will be completing the reformulation across the line of Gluti’s products – Glutino’s products by the end of the third quarter, we will improve on taste and health benefits. So as we said when we acquired the business, the taste delivery was an opportunity and a priority. We believe we all have significantly improved taste in all of our Glutino products, as well as in improving health credentials.

On Glutino product innovation, we have 12 new Glutino products shipping in the third quarter. These include a range of pasta products, new crackers in a range of snacks, potato chips and potato and two new spread items. In Glutino brand in marketing, the focus is on unifying the brand into one integrated brand marketing strategy. We expect to be shipping the new brand early Q4.

And, finally on Glutino profits. We expect gross profits and gross margin improvement from Glutino beginning in Q3, as we can sell the Montréal facility and move production, pretzel production to the States from abroad. Some comments about Udi’s and how we expect it to contribute to our back half of 2012.

As mentioned, we believe combining Udi’s and Glutino is going to be – create a powerful growth platform. Udi’s strength and bakery combined with Glutino’s strength in grocery will allow was provide us a really, truly comprehensive solution to retailers and consumers.

First on Udi’s placement. Given Udi’s high velocities where the brand has distribution, the growth story is compelling and the Udi’s brand will be a natural extension to the current top to top discussions we are engaged in with major retailers.

We’re moving to integrated sales efforts in Q3 to increase the bandwidth and integrate both brands on these top to top goals. Udi’s marketing, we plan to leverage the powerful social media platform with over 1 million FOUs or friends of Udi’s and look to leverage initially against Glutino as a renovation project is completed and these products meet the quality standards the trends of Udi’s have come to expect.

Udi’s products, the company has a robust innovation pipeline and bake goods that will ship in Q3, including (inaudible). In addition the company just completed a packaging refresh and start shipping in June. We expect this fresh and friendly packaging have a positive impact on sales.

Udi’s profitability, we expect the acquisition to realize synergies over the next 12months to 18 months of approximately $2 million to $3 million. This will achieve to cost savings across both organizations and ingredient packaging, sourcing production, operation and distribution, warehouse in sales and marketing.

We also are beginning to leverage our openly located state of the are plants in Denver and Montréal. We are already producing the fast selling new Glutino chip in Udi’s Denver facility and in time we are producing select Udi’s items in Montréal, Port Canadian and Eastern city US sales. But two fast growing brands this flexibly will get also offer another unique competitive advantage.

Next I’ll review of the milk for the second half. Our milk business has gained national distribution and while we achieve scale and profitability in our lead markets, we are yet to achieve the necessary scale for this business to pertain profitability across all markets. In an attempt to build scale, we’ll be testing a new milk product in the third quarter that we believe will add a new exciting dimension and expand our consumer reach. This new test market product has the potential to be the milk what our Spreadable Better distributing to our spreads business.

As a potential to expand our consumer base and bring us the scale we need in milk to put us on the path of profitability in all markets. We’ll be providing more details in this product launch on our Q3 earnings calls once that’s shipping.

Once we determine the potential of this new entry, we’ll determine of a national strategy can achieve profitability, if not, we were, we can move to profitability by scaling back to more profitable reaches and accounts and while these decisions we made towards the end of 2012, we just want to make sure that investors know today that we’re focused on gaining profitability on a macro in our milk platform.

Probably I’m excited about the success of Spreadable butter as it will help us ensure that we hold the line in our core spreads and grocery business. This product enables us to source volume from better participate in a fastest growing segment in Spreads and Butter and increase our market share in the overall premiums spreads and butter segment. To build on this early success we’ll be launching additional items under Smart Balance spreadable butter to build out our better butter portfolio, we’ll provide more details on these launches on future calls.

Let me end the call by restating our vision, which is to create a health and wellness innovation platform that builds brands, targeted at highly motivated consumer need states and fuel growth through new signs, products, channel expansion and brands. Our focus is on supporting each of our brands, a robust pipeline of innovation, category leading brand and packaging graphics, and brand marketing, strong consumer, customer partnerships and fast track distribution build out and strong consumer support do marketing and education to drive awareness and loyalty. Our vision is to help change the way we one product, one solution at a time.

With that, now let me turn the call back over to operator for Q&A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we’ll take our first question from the side of Scott Van Winkle from Canaccord. Your line is open.

Scott Van Winkle – Canaccord

Hi. Thank you, guys. Congratulation on the Udi’s deal.

Steve Hughes

Thanks Scott.

Scott Van Winkle – Canaccord

So a few question. First in the guidance, so I’m looking at the numbers, I actually, my model wants to go higher than what you’re guiding. And I’m wondering, what kind of expectations you’re trying to give us for that core spreads business, if you could kind of just lead us in a direction?

Steve Hughes

We think the core spreads business again, we will be a solid performer in that mix, we’re not really taking didn’t really change our expectations and kind of hold the line strategy relative to either second half of the year or in 2013. I think the overall way to look at this guidance is, again we typically don’t give guidance till November on the third quarter call. We want to give preliminary guidance, we’ve already had really Udi’s into the portfolio for a month.

We think that that guidance we gave is a guidance we can sleep at night with. And we hope that you’re instincts are correct and we’ll continue to update that as we give more traction understanding about how the business is going to play together. But relatively a core correction this reflects a solid outlook for hold the line strategy.

Scott Van Winkle – Canaccord

Yeah. We think really the back half of this year and next year guidance, I get exactly why you are coming from there.

Steve Hughes

Also Scott, the one thing that’s kind of interesting – it kind of bodies this year on spreads. We’re kind of longing down on best on spreadable butter. Next year, Bestlife will be wind down as best as hopefully spreadable butter continues to build scale. So I actually think that we feel very good about hold the line on the total core spread strategy and we could do better than that. I mean we really do like we proceed on the spreadable butter in these early stages.

Scott Van Winkle – Canaccord

Got you. In India, I believe $2 million to $3 million of cost saving or synergies with the Udi’s deal. I think I look at it is that’s probably Udi’s Glutino together I mean, is that’s the way to think about it. I mean part of that $2 million to $3 million going to reached on the Glutino side because you’re bringing Udi’s in?

Steve Hughes

Yeah, I mean for example we had one of the Smart Balance, the Smart Balance, we were going to hire VP of natural sales. Well, we’ve got the best VP of, the best Chief Consumer Officer in natural sales, Rich Clark from Udi’s. So he’ is going to take over that role, we’re going to see a really integrated view already been integrated. We are going to have meeting in two weeks integrate kickoff sales to get our core Smart balance team in engaged in the mainstream customers. We are going to integrate on the natural site for all three brands.

And I – my hope is we’ll have more synergies here. I mean we are going to – is it the lowest after one month we are starting to work – we’re starting to work the project. We’re seeing some nice opportunities of commodity costs. We are just simply with – we are paying for an agree on Glutino is different from what they’re paying for agree on Udi’s. So I think the ability here then put together integrated look is going to be – is going to be pretty compelling.

And it will the nice thing is arguably you can say there should be more synergies, but when you got a business growing at 80% on Udi’s and you’ve got Glutino ramping up at 30% and I think that it could go higher. We don’t want to depending as a composure, we want to lean into this pretty robust way and I think, we will end up with a very nice integrated efficient platform. But it’s going to be one that’s going to be growing at the rate that we don’t want to be cutting corners in terms of overhead or picked any rash decisions. The number one thing that we have on Udi’s right now was the new harm. This is working beautifully, but for that we can help, but let’s not losing any boards in both way.

Scott Van Winkle – Canaccord

Is there any– I can’t imagine where would be, but is there are any seasonality at Udi’s?

Chris Sacco

There is a little bit right now, they were very strong hamburger and hot dog bun business. That this is a second year and that’s going to be bit of a surge in the second quarter, early third quarter. October is going to be interesting, October is the big commercial month and we are locked and loaded one Udi’s and Glutino. So I think that – I don’t think I tried to tell seasonality when the businesses are growing this robustly.

We actually had this conversation couple of weeks ago at the senior management meet at over Udi’s trying to find what this seasonality it’s kind of hard to see it at this point when you are growing, you’re building month-to-month, but I think that back-to-school be important, I think ultimately if this category ever sellers out growth wise, you’ll follow the school here a little bit, but I don’t think there is anything right now we can point to and say it’s going to end differently.

Scott Van Winkle – Canaccord

That will – I don’t mean to monopolize the question I apologies, but so to that – to that end you listed $23 million in the second quarter and your guidance basically for – it will be over $100 million next year. We will see what it should be little higher than that?

Chris Sacco

What I think that’s a – I think again, this guidance’s, guidance we feel – we can sleep at night with having on the company for a month. We the unique thing about Udi’s is that typically when you have a seller’s case presented in a sale process, you newly discount that seller’s case down. Duties consistently outperformed that pretty materially. And where we’re right now is we have a 2013 seller’s case and we’re developing a much more granular look at 2013. I think we get to the November call, we might have a different perspective. But right now we think this is obviously very safe perspective.

Scott Van Winkle – Canaccord

Okay and then last question our yield before that I apologize I missed little part of the call, distracted with the stock. But did you talk it all about commodity cost on the front side of the business with this drought in soybean. If you have any commentary there I will be great. Thank you.

Chris Sacco

So far, soybean oil has in spite, it’s about where we – it’s about in the zone, we have plan for an expected we’re obviously kind of cover the balance of this year. But 2013, we’re going to obviously watch it carefully there is going to be some potential impact on some of the core and based ingredients that are for Udi’s and Glutino we’re doing to work right now, let’s see how material that would be. Right now we don’t see, the price in most near term benefit we’ll see is, both pricing and license is going to go up and that will close this gap, the kind of artificially open in the second quarter. But so far soybean oil we’re not seeing anything in this franchise.

Scott Van Winkle – Canaccord

Thank you.

Operator

And we’ll go next the site of Jon Andersen with William Blair. Your line is open.

Jon Andersen – William Blair

Hi, good morning. Thanks for taking the question.

Steve Hughes

Hi, Jon.

Jon Andersen – William Blair

I guess just beginning with the distribution effort, sounds like you made some very good progress around Glutino with top-to-top discussions. Where are you with respect to Udi’s, just having obviously close the transaction. What’s the timing there in terms of having those top-to-top and potentially rolling out more items than more retail account.

Steve Hughes

That’s where a kind of exciting impressive things is, really 10 days after we close the deal we were.. had a combine call down Wal-Mart that was very well received. That will play itself out across of the top 20 accounts over the next 60 days. I think a lot of work we’re calling for Udi’s in the second half of this distribution it’s already kind of done and in the mix. I think you’ll begin to see the benefit is combined effort probably the first half of next year. But it’s a pretty, our customer.

And I’ve been doing this for 35 years. I’ve never seen customers had a loss about how to deal with categories. So anxious to find somebody who has got, speak the language, has all the information, has all the insights, has the brands of the portfolio. That really say, tell us what we should do. And we’re actually having those kind of conversation. So I think that the – I would expect a lot of opportunity near term on Udi’s. I mean we’re going to have the first really kind of the conversion meeting in two weeks where we get our mainstream Smart Balance sales team engaged.

But there is, for us calls, we really strive on to have a lot of benefit this year, but I think some pretty thing is going to happen in 2013. We’re having the kind of conversations, while we don’t have commitments, we’re getting the kind of conversation that have all the right buys. And I think it’s going to be – I think it’s going to pretty exciting and a lot of fun, I mean this is clearly, you look at Gluten-Free and also we’re at balance, I mean these are businesses that have the sun in their face and one at their backs. And we are really uniquely positioned player in Gluten-Free and nobody else can have these caliber of conversation with the customer base.

Jon Andersen – William Blair

Okay. Shifting to the margin side, I know you’ve talked in the past about, I think targeting thousand basis points for more of margin improvement in Glutino with some of your supply chain optimization effort. Is that still the target at this point or have you updated that and where are you in terms of implementing those initiatives.

Chris Sacco

Yeah. Hi, John, this is Chris. We are still confident that we can achieve thousand basis points in margin improvement that we’ve talked to in the next call it 12 months out. We are I think you’ll start to see as we guided to our margins in the second half will be stronger, expect to be stronger than they were in the first half, that’s going to be largely driven by these projects that we talk to with Glutino. So if you recall the consolidation of our facilities as well as Steve mentioned on the call, taking our pretzel production from abroad to the U.S. So those projects are on time as expected and so we’re reaffirming that.

Jon Andersen – William Blair

Okay. And then just one last one guys on milk. Is there any probably not I’m guessing, but I’ll ask anyway. Any more color you can provide on kind of what you are thinking here for milk in this new product. And then I guess more broadly, it sounds like considering the potential for scaling back that business, if it will improve profitability. How you’ve kind of incorporated that thinking into your guidance for 2013, because I think you’re still kind of an investment at this point?

Steve Hughes

John, we have a – still have a bit of an investment mode in the 2013 number stepping down a bit. Milk is really kind of, it’s a very important brand, business from a brand standpoint. I mean the people as soon as they come into milk, actually buy four times more Smart Balance products and once they come in through spreads. I think the milk’s presence has helped the credibility in a fast track on this better butter, I think we are now seeing this as a healthy dairy kind of position business. But and when we’ve had, we’ve gone about 50% of the U.S. that can be a nice profitable business in the next 12 months, if we chose the not invest in the balance of the country.

We still think though that, we know that scale, the key is how do you fast track the scale and this new product launch we have, apologize for being a little (inaudible) but if you don’t want to, for expected reasons I don’t want to get anything out until, it’s one of the shelf. But this is a proposition that has the potential, 100% will come out of our milk strategy, could have velocities that are two times our current milk business. I think we test market this product, if it sells 50% of last year at current milk product then we pullback, we don’t expand this new product and we pullback milk to markets that we really can generate nice profitability at this point.

If this product is two x milk, then we probably lean in and we get our shelves scale quickly, more broadly. So we raise wide open on this, it’s been more challenging than I thought what it had been certainly outside again going in to West Coast typically healthy products like this take off from the two coast and you fill in the middle. Here we’ve had great success from the East Coast, but West Coast has been kind of challenging and a contraction one.

But that I think about this team, I mean, better butter is a pretty brilliant strategic evolution for our spread strategy, whether or not this milk idea works or not, it’s a pretty brilliant idea, it could. And I think that’s kind of, I think is the most encouragement over for the future, I think the resources and genunity of the team keeps working the challenge. But we’re at a point with Milk that we want to be, profit on milk in the next 12 to 18 months and we’re going to see which of this two paths gives us the highest confidence during that, clearly that this new product works and gets the scale nationally, that’s what we’re shooting for, but we’re prepared to live with more focused effort on milk if that’s necessary.

Jon Andersen – William Blair

Thanks, Steve. Thanks, Chris. Good luck going forward.

Operator

We’ll go next to the side of Andrew Wolf with BB&T Capital. Your line is open.

Andrew Wolf – BB&T Capital

Thank you. Good morning. All this growth on Gluten-Free kind of switched my mind to capacity. So I know you’ve used a lot of co-packers what Glutino did. But what is between your internal facilities in Colorado and Montréal and co packers you trust with quality and so forth, do you have a feel free effective capacity, some of the top stock meetings, are you going to be able to produce the product to the decree it will be ordered?

Steve Hughes

The nice thing on this is that, as a starting point, we just made this major investment in Canada that I think we started capacity there. Some lines (inaudible) but overall we felt we had a 100% capacity kind of expansion there. On the Udi’s, I mean EA associates. I mean they did not cut corner. I mean they have invested robustly aggressively in capacity and there is about the same kind of capacity opportunity there has we had at Montreal that said when you certainly talk about one brand growing at 80%, one brand going at 30% accelerating and you’ve got some conversation happening with major customers that might take a place as you can’t imagine today.

We’re have our eyes wide open with that, I think one of the key thing right now is getting ourselves up as we produce Udi’s product in Canada and Glutino products in Denver. So we have some flexibility but we may need to make some more investment there. We’re co-packing the pressure in our snack products in North America. We think we those have excellent capacity opportunities. But it’s going to be some where we’ve to watch carefully. It’s obviously falls into the high class problem category.

But we’ve got very strong operations team. I mean we’re really pleased with the team from Glutino and the team from Udi’s. And we’ll make those decisions as necessary and we’ve got and there are also opportunities with their things were currently co-packing. Then we think we might actually we’ve to bring couple bring select items in site and actually since it’s been Glutino’s gross profit structures. So we’ll obviously keep our eyes wide open. I mean that’s one that will we’re opportunities with these ways of 30 customers is we talked a language and we know what their expectations are we can beat them. The challenge is we going to make sure we’d love to that even if this thing grows very aggressively and we end up chasing at one of there. We’re going to be up front of it. And we have got the capacity to do that we need to.

Andrew Wolf – BB&T Capital

Okay, thanks. That’s good color. I appreciate it. I wanted to move to consumption trends in Gluten-Free. The 80% sales growth at Udi’s, could you give us a sense of roughly how that breaks down between consumption and distribution?

Steve Hughes

Okay, we think that it’s first 75% consumption and 25% distribution. That’s a little bit because of the – we have a business still has fairly narrow in distribution. I mean the top Udi’s bread items which are high velocity items. I think right now we’re only 60% ACV. So as we look at the underline Gluten-Free category growth. We track these top ten brands which we now have one in number, we wanted two with Udi’s and Glutino. And they are growing about 30% I mean it’s a very that kind of we think reflects the underlying growth rate of the category. We think with the things I mean Udi’s, I like think it got 80% rather, But It’s going to stuck comping some sales and we obviously, that growth rate would come down. We also have those things to Glutino food rate can go up.

Most of the distribution we pick up on Glutino has not shift until the third quarter. So that’s kind of new, new comer there. But we think this, what’s happen now as the retailer are figuring out. And where the main stream retailers are bringing up but this is not a bad, this is a fundamental trending, But honestly a consumer that have made on get their consumer in their stores. And it’s not an material loss of business. So they’re really looking that kind of become pretty destination with the group of the consumers.

So I think that the underlined trend on this is probably about 30%. Interestingly we’re seeing in one major customer we took a pretty big decision on Glutino. We’re actually seeing the velocity kind of increase a percent a week in that. And so that’s really, I mean, we’re really early stages in this, so it’s a lot just data points but the overall sense is that, that there is good underlying trend that could accelerate as the retail remains in retailers way, commit some serious space still in distribution.

Andrew Wolf – BB&T Capital

Gotcha. I just want to ask a follow up to your answer again I appreciate it. When you announced the deal, you said the SCV was about 25% for Udi’s, 24% I think in Mass, sounds like it’s gone up a little, but this is not driven by, you said then growth isn’t driven by distribution. But I think you just said the top items are 60%. So the opportunity just was a more to fill in 40% on the items under number one and two in the category or is it more to broadly distribute everything else?

Chris Sacco

I think the 25% average ACV has gone up a bit. But that’s average ACV. The top SKU the 60%. I mean, there I can see the top SKUs in the next 20 to18 months being at 80% to 85% ACV. And also the key there was driving absolute number between right now Glutino has 8.4 items in the shelf, Udi’s has 4.5. So we have 13 items on the shelf today. The key is how fast we can get them to 30. Now that two years, is that three years and two weeks we’re having meeting our sales, our sales teams, our customer teams. And that is exactly the focus was, by account, where we’re today and where we need to get out. So I think this is, I don’t expect big dividends on that effort until the first half of next year.

But I think that this is classic of a powerful trend high velocity product and lot of weight space. I mean we’re launching under Udi’s. I mean they’re launching for tiers and sold our products yesterday, you wouldn’t tell that you came to a difference between them in a typical floor to our tier. I mean how big is that I am going to be, I think it may not be big as bread item, But it’s not going to be an immaterial launch and with generals but I guess.

So it’s just – there is a lot the build out that kind of comprehensive portfolio, for bakery and grocery items. And then you have just nothing but uptakes, right now we’re having 30 ends on the average social. In some accounts like natural foods account we already have 60 items for show. Some Canadian accounts we have six times on the show. So it’s, and we have a growing recognition across grocery retail and just this is a big trend we need to, you need to get front of this and we thing for the natural proceed and they partner with.

Andrew Wolf – BB&T Capital

Steve, last question on Udi’s food service. You mention that if not today when you announce a deal. Sometimes for CPG businesses it’s an afterthought sometimes it isn’t, but are for natural, natural organic and it really hasn’t taken or of beyond certain CapEx could you select categories, say like in chicken. But I could really sell how this could be something in food service, because such basic need and such basic item on the table. So A, I wanted to get your sufficed on that and B, what’s going and does it. Seriously do you have the bandwidth to focus on foodservice now, or do you have to kind of show that for a while and really get retail then?

Steve Hughes

This is where the real hidden values. So then Udi’s acquisition. They had invested any foodservice team and I think now it’s 8 to 10 people to vote against foodservice. And they’ve been doing this for about a year. And I don’t affect with services, it’s kind of a build it and they will came, and you have to make some sunk investments. And you guys start to hammer away and hammer away. There is no question as a big opportunity here, there is not a wide competitive set of people offering Gluten-Free product.

There we have a head start because that effort has been in place. There is a lot of great conversation going on, right now not a lot of big hits but I think in all the right kind of conversations, we think for Tiers it’s going to be pretty meaningful in that dialogue such as Udi and like. So we’re going to continue we’re going to lead in that strategy continues to support the investment to date. That team is also going to pick up for a balance factoring Glutino products we may launch some grocery products, some of the best Glutino items like, crackers and pretzels and went to that hundred, Udi’s versus Glutino for that channel. So lot of pieces here to put together.

So I don’t think we have anything huge report today. But we have the right investment in place, the right commitment, fellow who runs that business has a Pepsi foodservice business. It’s a long-term proven professional in that industry we are investing behind the team, we have an inside sales effort. We have outside sales output. So again I’m not expecting big things near-term, but I think we’re making the right moves today and we’re having the right kind of conversations and we have the right product portfolio. So something good should come out of this, but it may not be immediately.

Andrew Wolf – BB&T Capital

Got it. Lastly, on Spreadable Butter and this will be the last question. You said you promoted $2 million worth and obviously got good trial. What’s your thinking in this economy and so forth on conversion into next year or later this year?

Steve Hughes

We think this is going to continue to build, this segment was is now I think at about $160 million run rate and (inaudible) pretty much at 85%, 80% of it. We’ve now, the category is growing 30%. I think this is a segment that over the next three to five years could become a $400 million, $500 million segment, it’s a great product. And the beautiful thing is that that’s a eight ounce product, so the absolute price point is in sticker socket, its below a three dollars price point.

So we think that the most encouraging thing we’ve seen well we love it could do for us strategically, the fact is its Smart Balance, it looks like it’s I think somewhere like 75% incremental to the segment and the total segment is growing 30%, (inaudible) is growing 16%. So this is a very healthy segment, in a very unhealthy category. I mean let’s face it between the spreads trends, in butter is butter and has been benefiting from some price differentials to spreads.

But we think it’s kind of a, it’s just a remarkable complement to our spreads business. And we’re going to lean in hard, we got some new products coming, we’re going to continue to support it. We think it will be a significant business as we exit the year and an important part of our story, I mean our objective is not to hopefully hold the line of profitability, be able to grow the profitability in spreads category. We think this gives us an opportunity to do that, we’ll see whatever we can do that as we get little bit further to it.

But it’s red-hot launch, the team has done a fabulous job, gain distribution, its moving, the customers are lean into it, I mean we’re still, yeah, we still we added close from the remaining distribution gaps recently, couple of major count to ship. So we’re going to be ready, we hit butter season in the fourth quarter, we’re going to have the right footprint drive the trial against in. The nice thing is we get the repeat numbers, try and repeat number every week and the repeat curve is very encouraging. And if you try the product, you’ll agree it’s a great product and has the ability, I think the ability really create a sustainable complement to our spreads business.

Andrew Wolf – BB&T Capital

Yeah. (Inaudible) focus group the one I have tried it, great. So leave it at that. Thanks a lot.

Steve Hughes

Thanks.

Operator

We’re going next to the side of Mitchell Pinheiro with Janney Capital. Your line is open.

Mitchell Pinheiro – Janney Capital

Hi, good morning.

Steve Hughes

Hi, Mitch.

Mitchell Pinheiro – Janney Capital

Most of my questions have been answered. Just a couple, sort of follow-ups. I’m still trying to understand, just taking look at like Udi’s performance in the last quarter, 80% growth and you said something like about 75% of that or 25% of that would be like distribution gains. But so it will be up 60% sort of same store sales. Of the 60%, I mean is this, are you stealing share, are we seeing the Udi’s steal share from main stream bread. Are you seeing people that I’d be surprised given the most Gluten-Free buyers do heck a lot of research on products and things like that, they just discover that there is bread, is there, within that 60% a lot of new products that are driving it, but the trend is –

Steve Hughes

The hamburger buns and hot dog buns which were launched last year and kind of first year didn’t do very much, have been a very big success. And that’s a piece of this. But you’re still talking much about the power small numbers, I mean $23 million in revenue currently we felt by the major bread guys, I mean it’s great number for us. But it’s, so I think there probably is some, but it’s just broader I think awareness that these better products are out there. I mean the phenomenon of Udi’s is a three year win sprint to once approaching a $100 million run rate.

And I think that is attribute the fact that they do have products that are kind of now trade our products, actually in some cases it might be better products in your traditional good products. So again the key on Udi’s is going to be, there is a good investment against the social marketing model that they have and I think does truly drive the business. I think the key one is going forward is, they really have 4.5 Udi’s item on the average grocery store shelf. We make 45 items and we are adding like six or seven or more is just how do we get that build out.

And the nice thing is one of the most established channel, most established customer in natural. We’re seeing solid 30%, 35% growth rates. So that’s a channel arguably been Gluten-Free as a destination price for quite a well. So I just think that this is and a lot of people I mean it’s funny, I mean Bill Riley goes sets up his tip of the day, his first tip of the day really confronted by anything, even Gluten-Free feels great, it was some way, everybody should do it or buy Glutino presents. I mean, we’re getting those kinds of shade out there they’re not totally quoting to buy us certainly, as it is growing recognition this is a diet that has broader appeal than just Celiac.

Mitchell Pinheiro – Janney Capital

Okay, so when you look at next year I know, you’re not going to give more detailed guidance, but just sort of conceptually in for Glutino and Udi’s together living Earth Balance alone for second. How do you think about, how should we think about, sort of same-store sales versus distribution games, or within same-store sales. What’s new products, SKU increases, how should we think about, like in broad percentage term?

Chris Sacco

That’s probably more detailed than we’ve got, way out to acquire that for September within the November call. But I think, what we would have think about is, we would expect and I would expect to be did that any new distribution. The categories going to grow 20% to 30% and we’re probably going to be in the higher end into that range given the caliber products the distribution. The key question is we’re having this meeting to which the sales team. It’s going to be a lot of, okay, how fast can we do it out the 13 items, and how that we’ll get food by account.

So there is there could be a component here where you have a huge step change of distribution next year. We’re not calling that today but we believe still we’re in a comfortable about that in November. But it’s going to be maximize the distribution of the current products that are proven performer in both lines adding new products, the complement the current line we’ve got some exciting new product initiatives there. And then with the third is, how do we activate the consumer against us. And we do now have, what the trends of Udi’s and the whole social marketing models, something that we might be leveraged process, Udi’s and Glutino.

So it’s clearly silver-waste base and that’s going to be a customer-by-customer discussion decision. We are encouraged by some lead customers that are making moves. We have other customers I know that it might move but how really kind of got him soul wind up against it so. And then it could be – we think that the guidance we have given today is certainly guidance. We think we have more, a better handle and more granular view of this certainly, when we talk to you on November.

Mitchell Pinheiro – Janney Capital

Is there any – what’s the pricing how is pricing done in Gluten-free and what do you expect, do you expect any pricing pressure at the end of more mainstream?

Steve Hughes

I haven’t seen that to date, this business primarily right now is with service to distributors. So there is actually some customers that have taken into ware house, we’ve seen a actually a reduction of price which is all basically distribute and market greater away. But no real price pressure at this point. I mean the better proxy have come out and all come out kind of with the high end of the iceberg. And we don’t think that this is not a price sensitive consumer. This is the consumer who is kind of really wants to find the product the replaces, fill the gap as because right now when, I mean this is where we’re going to tore tier, I mean if you are a good and sensitive consumer, you may never eaten a (inaudible) right stuff on the menu this is, so I think that there is a good combination of opportunities here.

Mitchell Pinheiro – Janney Capital

Thanks, just a couple of things. How should we think about the pace of gross margin improvement in the second half of this year?

Steve Hughes

I think we’ll take about Chris will probably pick up what half of that about the fourth quarter on Glutino.

Chris Sacco

I mean just talking about the Glutino.

Mitchell Pinheiro – Janney Capital

Sure, I’m sure.

Chris Sacco

1000 basis once I think they will pick up a bit. In Q4 we should pick up that, see about half of that core come through.

Mitchell Pinheiro – Janney Capital

Okay. And then final I just want to ask a question, is mentioned something in the call you said October is a big promotional month. Are you referring to spreads, or you referring to the Gluten-Free side?

Chris Sacco

Gluten-Free side, every two big months May and September that our kind of Celiac association that kind of got people focused around. And in May and October is feverish and we have some major retailers doing some interesting merchandising programs that they haven’t done before. I mean we’re not too sure, how that’s going to play out, but we really got a lot of program inline up against both Udi’s and Glutino.

Mitchell Pinheiro – Janney Capital

Okay. Thank you, very much.

Chris Sacco

Thanks.

Operator

Your next site of Chris Krueger with Northland Capital. Your line is open.

Chris Krueger – Northland Capital

Good morning, most of my question are answered, but looking at the balance sheet, can you remind us what your total debt is following the acquisition at the second quarter, but current dept and may be plans for paying that down and what kind of interest rate, the blended rate is. Just trying to hand along with there to look for interest expense for next year.

Steve Hughes

Sure, So immediately following the transaction we’re – we have our dept is $240 million term loan and we have a $40 million revolver available to us none of that was drawn at closing nor is drawn currently. So we announced that we started off at the acquisition timing with the net debt position of $237 million. I’d expect for the second quarter of this period without Udi’s we generated about $8.8 million of free cash flow certainly a priority for us to pay down debt going forward.

The one thing to just think about as you do in your models in terms of interest expense, as we mentioned on the call and in the releases, we interest expense for the full 2012 to be about $14 million, that includes $2.4 million, that will incur in the third quarter related to the write-off of the deferred financing cost that are on our balance sheet from the old facility. So in terms of run rate, just keep that in mind as you are doing your model.

Chris Krueger – Northland Capital

Okay. So really to get the $14 million on average about $5.8 million per quarter, but would the run rate be more than $3.5 million range how I should look at that?

Chris Sacco

Yeah, in terms of interest, remember that we also include the amortization of new deferred financing costs in our interest expense line. You can expect that’s going to be about $2 million a year.

Chris Krueger – Northland Capital

Okay. Thank you.

Operator

Next at the site of Amit Sharma with BMO Capital Markets. Your line is open.

Amit Sharma – BMO Capital Markets

Hi, good morning everyone.

Steve Hughes

Hi, Amit.

Amit Sharma – BMO Capital Markets

Couple of quick detail questions first. Steve, you said marketing expense was maybe Chris said, marketing expense was $2 million higher for spreadable butter related product and if we look quarter-to-quarter, it is still online. Is that, did you reduce marketing expense for something else?

Steve Hughes

So, that’s right, Amit. In terms of the devoted expense against spreadable butter, I think we set a separate launch expense that was, it’s in line with I think year-to-year comp, Chris, marketing is going to be a kind of in line with last year, but this is focusing that those dollars against spreadable butter, if we didn’t have spreadable butter – we didn’t want spreadable butter this year and marketing expense probably $2 million lower this quarter.

Amit Sharma – BMO Capital Markets

All right. And going forward we’ll obviously have more marketing expense as you add Udi’s as well. Are you able to give us a little bit more color of what it will be for the whole year?

Steve Hughes

No, but if we think in line of what is built into the Udi’s P&L, Udi’s has had a consistent marketing spend number, I don’t think we’ve shared at this point, we may be able to do that in the next call. But more of the opportunities here is, these are businesses that both, well all three of Earth Balance, Udi’s and Glutino, really don’t require investment spend to drive the growth. Now we think there is going to be actually as potentially the spend more money against specific programs that drive velocity, but you know its relatively lower slotting which is going to distributors, we’re relatively lower trade, because it’s not a price sensitive business.

And so we’re going to be spending money when obviously. So now see kind of connecting and leveraging that social marketing model for both leveraging it up for Udi’s and connecting kind Glutino to it. But a lot of that are other spend is going to be demos going to all the Gluten-free health fare customers events. Udi’s has a college ambassador program where they actually have focus on each, on major college campuses. We are actually working to try to get Udi’s into the foodservice, outside it’s a really Genius very well done, marketing program. I think we would apply it, was this in a way to Glutino but also potentially the great balance and Smart Balance.

Amit Sharma – BMO Capital Markets

And Chris, you said DNA expense for 2012 was, it’s going to be $14 million, is that include amortization expense as well?

Chris Sacco

It does.

Amit Sharma – BMO Capital Markets

Amortization went tangible that I mean.

Chris Sacco

That’s correct.

Amit Sharma – BMO Capital Markets

Okay, great. And then overall Steve, it seems like all the distribution gains that you’re getting or all the new placements that you’re getting is mostly distribution gains. I just want to say, are you taking shelf space away from any existing Gluten-Free product?

Steve Hughes

Oh, I think this is probably an element of that, we’re, but this also when the category is growing like this I mean the grocery industries growing 1% to 2%. This is a category that more space is going to come to overtime. So I would necessarily, and it’s also not as to find us and obviously might be in terms of what the actual sections are, I mean we are still in the process of, how may for four food sections are there, how many eight food sections of the, how many 12 food sections are there.

How do we get customers this year they really need 12 foot section. I mean, the holy Grail is a 12 food section 25,000 grocery stores. But it’s, we’re the big fish in the small pond. And we will be bringing innovation to the marketplace that pays probably that hasn’t been seen across both grocery and bakers. I think– it’s exciting is velocity is on Udi’s particularly in the lead items are not natural food velocity was proximal, this are like serious SKUs that rank – It rank respectively among mainstream products. So because your level credibility where this is actually, this that people can see scaling and then we wish to see how it plays out over the next two or three years and how the grocery retail is really kind of get the space commitment to it. And then as importantly how we are working together that kind of drive activation in consumer awareness.

Amit Sharma – BMO Capital Markets

As you ever consider going Ambient orient or not chosen for Udi’s given the velocities?

Steve Hughes

Velocity, I think the way we look at this, we didn’t this is a two tier brand strategy. Udi’s is a bit more artisan, a bit more natural, a bit more of a foodie kind of product. Glutino is really more main stream conventional alternative. We’re going to have, we ultimately will have Udi’s cracker that goes with the Glutino cracker. So I’d see as, within the next twelve months we’ll have a set of Udi’s items that are grocery items, we’ll also continue to – the other thing is on the bakery frozen side, you really have a need for two brands because you’ll have a product that goes in to the bakery for the velocities, whether in some bakery such have a frozen, but Udi’s velocity sets a 25% of the Udi’s product is actually sold slacked out in ambient temperature.

But you then would you put in the frozen, so what’s happening with Rich Clarke and the Udi’s team is they actually had a pick which session they go into, but they don’t want any other session now with Genius profit business and we can (inaudible) okay and we’re going to take Udi’s in the bakery, we’re going to take Genius into frozen. And we’re trying to see, I just saw Nielsen numbers the spin as number.

We’re starting to see nice pick up in terms of Genius in terms of its starting to climb the ranking back up, I don’t know if it become the number two bread, but could Genius be the number three bread versus Udi’s and give us a chance that kind of but they’ve got comprehensive solution. And we’re also getting, there is a lot of, our biggest challenge is going to be short selection as we look at this and there is no lack of ideas as the function where we’re trying to get done in next six month, in the next six months, in the next six months, the next six months, I think we’ll go with this footprint out pretty quickly.

Amit Sharma – BMO Capital Markets

And my final question is, can you provide us some color around what is the commodity exposure for the Gluten-Free portfolio. How much is corn or rice or anything it else that you can provide in terms of Glutino exposure?

Steve Hughes

We’re actually doing that work right now, we’re combining the total commodity purchases and looking right now. The first opportunity we have is, is going to be buying the commodities from the same person. There is going to be pressure up, we don’t know if that’s going to require pricing action, if there is pricing action required, I think we’re in a position to led that if that’s necessary. But we have – we’re starting to kind of understand through out what’s really happened in the last 60 days and what those application is going to be going out for 2013. But we’ll obviously have that tied down, put together the detail 2013 plan in the next two months.

Amit Sharma – BMO Capital Markets

Great. Thank you very much.

Operator

Moving to our final question from the site of Akshay Jagdale with KeyBanc Capital. Your line is open.

Akshay Jagdale – KeyBanc Capital

Good morning. I’ll keep it brief. Can you hear me?

Steve Hughes

Yes. Okay perfect.

Akshay Jagdale – KeyBanc Capital

Just on the Gluten-Free trend just natural organic in general. So I can make a parallel there. I mean are there any brands that you’re aware of that are actually growing at the rate at which Glutino and Udi’s are growing and our at process level that you intend to get to. I mean have you seen any in the public space there is not that much out there has the type of top line growth and also bottom line in the sort of potential that you’re talking about. The top line I guess we see examples of all the time is being in a successful categories and certainly this looks like, it’s a category we have momentum. But I’m only really want to focused on that margin side, especially given sort of the mix success you had with milk launch. So keep help us get a little bit more comfortable with the margin profile longer term and perhaps and you I guess an examples of what you might have seen while you were looking for these acquisitions.

Steve Hughes

On the margin side I mean clearly, if we can – we think we’re going to see significant leverages on SG&A and marketing expense and like as we look at 2013. And again we think that our launch for objective is to get to an any team with 20% EBITDA margin. We’ll see a line margin, we will think, will make a nice step in that direction next year. When you look a kind of comparable product opportunities I think it’s kind of interesting, one comparison is just taking Udi’s for everything else. Udi’s compare to Ani’s. Ani’s was up 20% revenue, made formerly endorse an EBITDA on the quarter. Udi’s it’s a larger business but Udi’s will grow 80% growing in generating $3.5 million a kind of comparable, but different trajectories.

When you take for example Udi’s and Glutino and at least in this last quarter $188 million run rate business going to 50%. And it was stand-alone business, it would have a strong profile related to EBITDA margin. So I think that’s going to be very interesting to play this out a clearly growing 50%. This hard to do with the base growth, but we have a lot of database opportunities to prompt opportunities to leverage. We want to be careful not to get ahead of our SKU’s here and that’s why we have given the guidance as we have. But we will learn certainly in the next.

We have tread on the November call I think we’re going have a lot, going to be a lot smarter about of the range as we expect, I don’t think there are many businesses, again the two hardest trends in the Glutens channel or Gluten-Free and infant based diet. We have the one and two brand in Gluten-Free, here we have one of the top two brands in the infant based diet. So it’s a lot easier look smart and we have win at our back and those we can really do.

But I think we, and I also think we have done two things I mean we certainly have seen evidence with Smart Balance more in the spreadable butter that we’ve got 70% we wished only the whole in profit there, but may be doing better than that. And we’re taking a initiative on milk that could be transformational or could confirm that there should be a nice more targeted business it makes money for us. So again I think we’ve got a good portfolio of things there to be working with the key is having this great work, really brilliant work. And we’re going to get each one of these business. And the outcome of that should be very positive.

Akshay Jagdale – KeyBanc Capital

Okay, thank you. I’ll pass on.

Steve Hughes

Thanks.

Operator

That concludes our Q&A session. I’ll turn back to our presenters for any closing remarks.

Steve Hughes

Well I just want to thank you by taking the time. Obviously it’s a same time for the company. The team is very focused, very fired up. And I think a lot of exciting days ahead for us. So again thanks for your time. Take care.

Operator

That does concludes today’s program have a great day. You may disconnect at this time.

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