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Green Mountain Coffee Roasters, Inc. (NASDAQ:GMCR)

F4Q 2012 Earnings Conference Call

November 27, 2012, 17:00 PM ET

Executives

Larry Blanford -- President & CEO

Fran Rathke -- CFO

John Whoriskey -- VP and General Manager, At Home Division for the Keurig Business Unit

T.J. Whalen -- VP, Marketing for the Specialty Coffee Business Unit

Michelle Stacy -- President, Keurig Business Unit

Suzanne DuLong -- VP of Corporate Communications & IR

Analysts

Bryan Spillane -- Bank of America

Akshay Jagdale -- KeyBanc Capital Markets

Bill Chappell -- SunTrust

Greg McKinley -- Dougherty & Company

Jon Andersen -- William Blair

Mark Astrachan -- Stifel Nicolaus

Matthew DiFrisco -- Lazard

Scott Van Winkle -- Canaccord Genuity

Marc Riddick -- Williams Capital

Tony Brenner -- Roth Capital Partners

Operator

Good afternoon and welcome to Green Mountain Coffee Roasters, Inc. Fiscal 2012 Fourth Quarter Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to the Company's Vice President of Investor Relations and Corporate Communications, Suzanne DuLong. Suzanne, please go ahead.

Suzanne DuLong

Thank you, Aaron. Welcome everyone. Today's press release is available on our website at www.gmcr.com. Consistent with past quarters, our supplemental prepared remarks have been furnished in a Form 8-K filed today with the SEC and will not be read on the call. We expect to file our Form 10-K later today. These remarks are available as a PDF in the events section of the Investor Relations portion of our website. In addition, we've also posted slides that summarize and supplement much of the information we'll discuss on this call.

On the call, Larry Blanford, our President and CEO will provide some brief introductory remarks. Fran Rathke, our CFO, will discuss aspects of the quarter's financial results. Larry will then provide some additional commentary about our business assumptions and our outlook. We'll then open the call to questions from the sell-side analysts.

Several members of our management team are with us today for the Q&A session, including Scott McCreary, President of the Specialty Coffee Business Unit; Michelle Stacy, President of the Keurig Business Unit; T.J. Whalen, Vice President of Marketing for the Specialty Coffee Business Unit; and John Whoriskey, our Vice President and General Manager of At Home Division for the Keurig Business Unit.

To ensure we have the opportunity to address everyone's question during the time we've allotted for this call, we ask that you limit yourself to one question. We will revisit the queue for follow-up questions.

Finally, I'll remind everyone that certain statements will be made today which are forward-looking within the meanings of securities laws. Owing to the uncertainties of forward-looking statements, our actual results may differ materially from anything projected in these forward-looking statements. We can give no assurance as to their accuracy and we assume no obligation to update them.

For further information on risks and uncertainties, please read the Company's SEC filings and the paragraph in today's press release that begins with the words certain information.

And now I'll turn the call over to Larry Blanford.

Larry Blanford

Thanks, Suzanne. Hello, everyone. We appreciate you joining us today. We're very pleased with our fourth quarter results and we're looking forward to the important holiday season which should provide a strong kick-off to our 2013 fiscal year.

We continue to execute steadfastly against our strategy and to make steady improvements on a number of fronts during the fourth quarter, including account planning, demand forecasting and inventory and balance sheet management.

Last quarter we discussed our expectations for our addressable US brewer opportunity and the potential impact of non-licensed single serve packs both brand name and store brand on our business. Since then we've seen single serve pack entrants and new single serve brewer entrants, but to-date we've seen nothing that causes us to change our expectations.

On the contrary, there have been developments both internally and externally that have left us with more confidence in our outlook than just a quarter ago. First, we continue to build an incredible bond with our growing base of consumers. As examples since last quarter, Keurig was named the coffee maker Brand of the Year in the 2012 Harris Poll EquiTrend Study joining Green Mountain Coffee as the coffee Brand of the Year.

And Landor Associates' annual Breakaway Brands Study, which identifies US brands showing sustained growth in brand-strength over a three-year period spanning 2008 through 2011, ranked the Keurig brand second in the nation, with 79% growth in brand strength.

In addition, we continue to execute against key initiatives during the quarter. We introduced the first of our Wellness Brewed collection of beverages including Vitamin Burst and Green Mountain Coffee Antioxidant Blend and Focus Blend.

We launched our Away From Home Vue brewer incorporating RFID technology. We reduced the price of our initial Vue at home brewer as planned and introduced a second lower priced model. We also added Snapple and Costco's Kirkland brand to our family of brands and successfully launched Eight O'Clock coffee in the grocery channel. And of course most recently in partnership with Lavazza, we introduced the Keurig Rivo, our Latte and Cappucino system.

Finally, with increasing brand strengths and continued product innovation, we believe that we will drive our revenue, earnings growth and free cash flow as we will discuss further today.

I'll now turn the call over to Fran for a discussion of our financial results and outlook. Fran?

Fran Rathke

Thank you, Larry. Hello, everyone. I'll focus my remarks today primarily on our fiscal fourth quarter results though I will highlight some annual comparisons where warranted. Our fourth quarter net sales were up 33% to $946.7 million. Non-GAAP earnings per share of $0.64 were up 36%.

Both metrics were above the guidance we provided on August 1, 2012, due primarily to higher than expected sales of single serve packs and to a lesser extent, a slightly lower tax rate and lower interest expense. This drove the associated earnings leverage we've discussed previously.

As we noted last quarter, our fiscal fourth quarter included an additional week which resulted in a 53rd week for the fiscal year. The last time a calendar shift like this occurred was 2006 and it will not occur again for another five years. In terms of quantifying what that extra week meant, it added approximately 90 million to net sales in the quarter and the year. It also added approximately $0.07 per share.

Despite this incremental contribution to the top and bottom lines, we believe it's appropriate to measure our performance on a year-over-year basis, excluding the impact of the 53rd week. Therefore, on an apples-to-apples basis, excluding the extra week, fiscal year 2012 net sales growth would have been 42% as compared to 46% and non-GAAP earnings per share would have been $2.33, an increase of 42% compared to 46% growth including the 53rd week.

We're very pleased with these results, particularly the fact that earnings growth was in line with our sales increase. We were able to deliver these results while tackling some distribution-related challenges in the quarter. To drive long-term efficiencies, we had transition fulfillment of one of our consumer-direct websites, Green MountainCoffee.com and our Away From Home business from in-house fulfillment to a third party fulfillment firm. They had previously been fulfilling our Keurig.com site and our grocery business.

We experienced some challenges with this transition which adversely affected customer service and product availability in several channels. I'd also note that one of our major fulfillment facilities is located in New Jersey. Like many companies with facilities in the region, post quarter close, we had some impact related to super storm Sandy, but I'm pleased to report the impact was minor. We are making improvement in our fulfillment-related challenges though we are still experiencing some delays.

Gross profit for the fourth quarter of fiscal '12 was $316 million or 33.4% of net sales as compared to $254 million or 35.7% of net sales in the prior period. Rather than go over the various factors contributing to the difference in this quarter's gross margin as compared to last year's gross margin, please refer to today's press release for this information.

Turning now to operating expenses, we were pleased that we were able to increase quarterly sales by 33% with a GAAP SG&A increase of just 17%. As a percentage of sales on a non-GAAP basis, SG&A improved to 16.8% in the fourth quarter of fiscal '12 from 19% in the prior year period as we leveraged SG&A expenses on a higher sales base.

I'm also pleased to report that we generated 76.7 million in free cash flow for the year. We expect to continue to strategically invest in the business as demand warrants and we continue to forecast free cash flow in a range of 100 million to 150 million for fiscal 2013.

In addition, as of today, we've repurchased 7.38 million shares under our previously announced share repurchase plan. We've used $175 million of our authorized 500 million towards the repurchase of these shares at an average price of $23.72 per share. We will continue to be mindful of the balance between share repurchases and longer term investments but if and when market conditions dictate, we will be active.

Turning briefly to the balance sheet, inventories increased only 14% as expected to 768 million at the end of Q4 compared to 672 million in the year-ago period. Included in inventory is a 26% increase in raw materials, most notably from the increasing Green Coffee. In addition, finished goods increased 10% due to a 38% increase in Keurig Brewed and accessories on hand. This increase was offset by a 30% decrease in our single serve pack inventories.

As discussed last quarter, the increase in brew and accessory inventory is deliberate to ensure adequate supply for the holiday demand. We have provided additional detail on inventory and its components in today's press release.

Now turning to 2013. For the first fiscal quarter, we anticipate total net sales growth in the range of 14% to 18%. We anticipate first quarter 2013 non-GAAP earnings per diluted share in the range of $0.62 to $0.67, excluding the non-GAAP items as noted in today's press release. As we stated last quarter, our outlook incorporates a meaningful level of brand-related investments including support for new product introductions.

For fiscal 2013, which is a 52-week year, we anticipate total net sales growth in the range of 15% to 20% over the prior year. Fiscal year 2013 non-GAAP earnings per diluted share in a range of $2.64 to $2.74, excluding the non-GAAP items as noted in today's press release.

For purposes of comparability, we believe it maybe more helpful to measure our year-over-year operating performance excluding the impact of 2012 53rd week. On that basis, we continue to expect earnings per share growth in fiscal 2013 to reach the mid teens. We expect capital expenditures in the range of 380 million to 430 million which based on our estimates is approximately 9% of our forecasted 2013 sales, down from 10% of sales in 2012 and 11% of sales in 2011. And as I stated, free cash flow in the range of 100 million to 150 million.

One final thought on guidance. As we said last quarter, we believe our outlook is realistic but there is leverage in our business in either direction. We have identified a number of factors that brings us to an annual mid teens earnings per share growth rate over the longer term. Should those opportunities or risks vary materially from our assumptions, we will adjust our plans and actions accordingly. But again, we don't expect that. We'll obviously know more as the year unfolds, particularly this first quarter which is an important one for us.

And now, I'll turn the call back to Larry.

Larry Blanford

Thanks Fran. Our fourth quarter fiscal 2012 results speak to GMCR's continued growth and we believe point to the significant opportunity still ahead for the Company. As we did last quarter, let's start today's discussion with the consumer and the continued adoption and growing awareness of the Keurig brand.

Since I last spoke with you in August, we've seen nothing that causes us to alter the expectations we have for the addressable single serve filtered coffee opportunity in the United States. To recap, based on the steady Keurig Brewer adoption rate combined with research conducted on our behalf by the Cambridge Group, we estimate the size of the addressable single serve filtered coffee brewer opportunity to be approximately 35 million in the US by the end of calendar year 2016.

Our outlook indicates by the end of fiscal 2013, our installed Keurig Brewer base in the US will be approximately 17 million, while approaching 25 million brewers by the end of fiscal 2014. Here one of our outlook is incorporated into our fiscal 2013 guidance along with some realistic assumptions about competitive dynamics included a mix shift to more value-oriented single serve packs as well as considerations associated with driving Vue Brewer adoption.

Fundamentally, growth in the installed base of Keurig Brewers is happening as expected and K-Cup pack sell through rates are stable. Consumers continue to choose Keurig Brewers more frequently than other alternatives and therefore adoption of Keurig Single Cup Brewers continues to grow at a healthy rate. In addition, our data indicates single serve pack purchases for installed household reservoir brewer per day have remained relatively consistent.

Despite quarter-to-quarter fluctuations in our brewer shipments, NPD data generally correlates with our own point-of-sale data and supports strong and steady growth of our installed brewer base.

For the three-month period ending September 2012, NPD reports that with growth of 32% over the prior year, dollar sales of Keurig branded brewers continue to fuel total coffee and espresso maker category dollar sales growth. Keurig branded brewers continue to demonstrate strong unit share growth, increasing share of the category to 15.2% of total units, up from 11.6% in the same period last year. Importantly, Keurig branded brewers remain the top four selling brewers in the category by dollar share for the period.

As many of you are aware, NPD recently added data from a number of new sources. Its data now represents an estimated 50% to 70% of the total brewer marketplace. We've provided the recast NPD data in the slides posted to our website in support to today's discussion.

Turning specifically to our Vue Brewer. Indicative of consumer's acceptance of single serve and Vue's stronger, bigger, hotter value proposition, Vue Brewer adoption continues and we believe this positions us well for expansion of the platform. We continue to believe the appeals of Vue platform will widen as we move forward with our previously announced intentions to introduce models with lower price points in fiscal 2013.

As planned we've lowered the price on the initial Vue model, the V700 from $249 introductory price point to $229 going into the holiday season. In addition, we introduced the second At Home Vue Brewer, the V600 in select channels with initial manufacturers for adjusted retail price of $209 that was featured at BJ's and on QVC at $189.99.

We had our first QVC event featuring the Vue V600 in early October. That was a success during which we sold 21,900 Vue Brewers and sold out during the program. We expect to introduce the third At Home Vue model, the V500 by spring 2013 in support of moms, dads and grads gifting season at a price point between $149 and $169.

Finally, we continue to expand the variety of beverages available in the Vue Brewer. GMCR's consumer-direct websites now offer more than 50 beverage varieties of Vue packs, choices that represent 70% of our best-selling K-Cup items in retail and grocery.

In October, we kicked off our long planned, Changing the Way America Brews, mail-in rebate event, opting for the first time to more aggressively drive brewer sales. From time to time as part of our regular marketing efforts, we expect we will choose to promote our brewers. Our goal with this particular promotion was to stimulate brewer purchases in October and thereby jumpstart the important holiday buying season.

We also expected a number of competitive offerings to hit shelves and strategically, we wanted to start off the season strong. Rebate amounts ranged from $20 to $50 depending on the brewer make and model purchased. Consumers responded strongly to the promotion and we've incorporated the response in our Q1 outlook.

NPD October data showed Keurig Brewer sales up 93% on a dollar basis over last year and up 90% on a unit basis. Now I caution listeners not to extrapolate that data for the entire quarter as October represents only the smallest portion of the first quarter sales. As we said previously, we continued to expect brewer sales growth rates to slow over time. However, we expect our brewer installed base will continue to grow meaningfully.

The rebate program promoted both K-Cup and Vue Brewer models, and I want to emphasize how we are managing these two platforms. We believe there will be a natural consumer-led multi-year transition from the K-Cup platform to the Vue cup platform. And while there are tactics we could choose to employ to accelerate that transition for the foreseeable future, our strategy is to drive both the Vue and the K-Cup systems.

Here's why? First, we believe there is a significant opportunity to continue to expand the demographics associated with the K-Cup platform. With an entry price point of $79, the K-Cup platform appeal to much broader consumer audience than the Vue platform can right now. Abandoning the K-Cup platform for Vue at this point in time would limit our ability to penetrate what we believe are still millions of potential Keurig households.

While we're making very good progress against our plan to introduce Vue brewers at lower price points as we just discussed, realistically we are a couple of years away from achieving the breadth of partner brands and brewer price points available with the K-Cup platform today.

The second reason why we'll continue to drive both K-Cups and Vue Brewers is the fact that it's still early days in Vue's production and adoption lifecycle. And as you'd expect and as we have previously noted, we've got some work yet to do on Vue-related cost to improve the profitability of the system relative to the K-Cup platform.

Importantly, we have significant capital efficiency, production efficiency and material cost reduction opportunities and are confident that we're on a path to improve the platform's margin over the next 18 to 24 months.

We believe consumers will continue to choose the Keurig Brewer that best suits their personal preferences, whether it's the variety of beverages available today in the K-Cup platform or the superior performance and customization that's made possible with Vue.

We'll get to the point where we are able to offer K-Cups and Vue Brewers at similar price points with enhanced beverage varieties which we believe will drive consumer preference toward the Vue and its superior performance. While Vue is the future, ultimately we will manage both platforms in a way that makes sense for customers and consumers, and puts us in the best position to deliver on our long-term financial outlook.

Turning now to single serve packs. As most of you are aware, two of the several patents associated with K-Cup packs expired in September 2012. In this, our first conference call post patent expiration, I'm pleased to say that we've not seen any marketplace dynamics that have caused us to think differently about our outlook for single serve packs. We continue to believe that growth in sales of system-wide single serve packs will generally follow the growth in the installed base of brewers over time. That, of course, leads to the question of license versus unlicensed system participants.

Well, as expected, we've seen additional unlicensed brands and are manufacturers emerge post patent expiration. We've yet to see anything that changes our view of the likely impact on our broader opportunity. We continue to assume that the total of all unlicensed K-Cup packs will represent roughly 5% to 15% of the system starting at the lower end of the range in 2013 and potentially increasing towards the top end of the range as we look two to three years out.

While we believe we will see additional unlicensed single serve packs emerge, both brand named and store brand private label, we believe GMCR will continue to be the leader in single serve beverages for the K-Cup brewing platform for several reasons. First, the strength of our broad license brand offering combined with our ability to continue to expand consumer choice within the system.

With 32 brands and more than 200 varieties at a range of price points and growing, we're confident that consumers will continue to find the choice and variety along with the quality and performance they've come to expect in licensed products with the official Keurig Brewed feel. And we keep adding more variety, including most recently, the addition of Snapple premium iced teas and Costco's Kirkland brand coffee. It's worth noting, both of these relationships were announced after patent expirations.

Second, our significant manufacturing expertise allows the beverage economies of scale to support increasing demand. Third, we believe our broad and growing intellectual property portfolio will continue to offer important protection against non-licensed single serve packs. And as we've demonstrated, we intend to defend our intellectual property vigorously.

Finally, and perhaps most importantly, we are continually innovating. As a licensed participant of the system, our partners are in a position to take advantage of future single serve pack and brewer developments and the innovations.

Now let's talk for a minute about our beverage partner relationships. All of our most significant partner brand contracts are multiyear in nature, even from this point in time. Beyond contractual obligations, we believe our existing licensed partners see value in remaining licensed system participants for the long run. In addition to our single serve leadership, we offer assurances around quality, safety and efficacy as well as continuity of supply.

We value each and every one of our beverage brand partners as they bring added variety and choice to the system which we believe increases the consumer appeal of the Keurig brand and completely differentiates our platform from all competitors. However, with 32 owned and partner brands now on the system, consumers' purchase intent of the Keurig Brewers is generally not dependent on any one partner brand but the choice of brands. Similarly, our business is not dependent on any one partner brand. Green Mountain Coffee remains by far the number one brand in the Keurig system.

In addition, in our fiscal fourth quarter and for all of fiscal 2012, no single partner or non-owned brand represented more than roughly 6% of our net sales. In fact, our largest contributing partner brand Newman's Own Organics is one with whom we've had a longstanding relationship and has been a part of the Keurig system for six years.

Now, as we continue to add beverage partners, we're constantly growing the opportunity for all system participants, including our own brands and as such we expect to maintain this high level of diversity. Indeed, we continue to evaluate the potential for additional store brands and manufacturer's brands and expect to announce new license additions going forward.

Now let me also speak to our margin structure. Over the last several years, we've been working to very deliberately expand the demographic reach and appeal of the Keurig system both in terms of brewers and beverages. Our goal has been to ensure the system can appeal to a broad range of consumer values from consumers that are brand conscious to consumers that our value-oriented.

This has meant bringing consumers lower priced brewers, providing beverage choices at a range of price points and thoughtfully utilizing distribution channels and brands. This has been the strategy behind the price tiering of beverage brands we've implemented over the last two years.

As of November, we have implemented the majority of our price tiering plans. For brand conscious consumers, the variety and range of specialty coffee brands in the Keurig system is unmatched. For value-oriented consumers, we've created price points to appeal to their sensibilities and our offerings to these consumers include Diedrich brand, Eight O'Clock coffee brand, K-Cup offerings now in retail, grocery and mass channels, respectively.

We have always believed that store brand private label single serve packs would be a part of the system's demographic evolution, though more so in the grocery and mass channels. And we said that post patent expiration, some of those store brands would be manufactured by GMCR on a licensed basis and we continue to evaluate strategic brand additions.

Our recent announcement with Costco for the Kirkland brand is an excellent example of this. We continue to believe that roughly 10% of total coffee category sales in grocery and mass, represented by store brand private label is a reasonable proxy for the store brand private label potential within the Keurig system as a whole over time.

We've held this stance consistently for several reasons not the least of which is the fact that consumers have demonstrated they will pay a premium for great tasting coffee, clearly establishing coffee as a brand-driven category. And in fact, research has shown this is particularly the case with Keurig consumers.

Importantly, where we are seeing unlicensed private label products appear on the shelf, they are most often appearing as customers are expanding available space for the category including significant commitment to Keurig-brewed licensed brand and offerings.

Before I conclude my remarks, let me spend just a few minutes on some of the things we are excited about as we look forward. First, we continue to see opportunity for long-term growth in a number of adjacent spaces along three primary axes; one, beverage categories for our current systems; two, new channel applications for our current technology platforms; and finally three, leveraging the power of the Keurig brand in new systems that target adjacent beverage categories.

I'll touch on each of these briefly. In adjacent beverage categories for our current systems, we introduced our new Wellness brand beverages, a collection of K-Cup packs, which initially include coffee, tea and other beverage options. These Wellness Brewed beverages are packed with added ingredients like antioxidant vitamins making it easy to enjoy the perfect combination of smart choice and great taste.

To drive (inaudible) Wellness Brewed beverages, our robust sampling effort of all six initial products is underway. We expect fiscal '13 will be an exciting time for Wellness Brewed with new Wellness product introductions and expanded retail distribution.

As for the pursuit of adjacent channel applications for our current systems, we introduced our Vue platform for the Away From Home channel as planned in September. The Away From Home Vue incorporates the use of RFID technology on the single serve packs, providing for optimum user experience even for users that may be unfamiliar with our brewer and its numerous customization options.

In addition to RFID, we are testing lower cost interactive technologies in our efforts to continually improve the total Keurig consumer experience on both brewing platforms At Home and Away From Home. The first example of our work on new systems that address adjacent beverage opportunities is the Keurig Rivo Cappuccino and Latte system, jointly developed with our partner Lavazza and introduced in early November. This new Keurig Rivo system combines the legendary simplicity of Keurig one-touch brewing with the authenticity of Italy's favorite coffee, Lavazza.

The system enables consumers to simply brew authentic espresso and espresso-based beverages with any type of fresh milk from the refrigerator and is available exclusively at Bloomingdale's for this holiday. Early feedback on the system and the user experience has been extremely positive. We're pleased to report we've got a significant waiting list for the product from Keurig.com consumers, and we're working closely with Lavazza to ramp production so that we can expand product availability.

In closing, I note that we are very excited about the holiday season and are supporting our efforts with new television advertising designed to speak to the magic of Keurig. These ads are already running and will continue to do so through the holidays. Based on these factors, and what we see right now in the business, we continue to believe we will deliver annual sales growth in the range of 15% to 20% with annual earnings growth in the mid-teens over the longer term.

While the seasonality of our business among other factors, including investments and long-term growth may cause our quarterly results to be above or below that growth rate, on an annual basis, we are confident in that range.

Finally, well, this is my last conference call. I'd like to say thank you to the amazing GMCR employees across North America. GMCR is a place of high energy and passion for innovation with a culture of inclusiveness and giving back. I'm proud and humbled by what this organization has accomplished over the last five years.

During my time here, we have taken GMCR from being a modest participant in single serve to an architect of change in the category from several hundred millions of dollars of sales to several billions from less than a 1,000 employees to nearly 6,000, and from limited distribution to mass distribution of Keurig products with significant and very impressive merchandising and display. Five years ago, no one would have imagined this is possible.

Discussing my intent to retire earlier this year, one of my top priorities has been to ensure a seamless transition to the next-generation of leadership. I'm confident that in Brian Kelley, we have identified an ideal successor, one eminently capable of taking GMCR to the next level of its growth and opportunity of fostering the creativity and imagination manifesting itself daily in new product innovation and are continuing to inspire this amazing organization to accomplish feats others deem impossible.

Operator, we will now take questions from the sell-side analysts. As Suzanne stated in the introduction, we ask that you limit yourself to one question. We will revisit the queue for follow-up questions. Operator, will you open the question queue please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll go first to Bryan Spillane of Bank of America.

Bryan Spillane -- Bank of America

Hi. Good evening.

Larry Blanford

Hi, Bryan.

Bryan Spillane -- Bank of America

And Larry, congratulations and all the best as you move on.

Larry Blanford

Thank you very much.

Bryan Spillane -- Bank of America

I've got just one point of clarification and one question. I just want to make sure I understand. The revenue growth guidance for 2013 is off of the base that includes the 53rd week, is that correct?

Fran Rathke

Bryan, this is Fran. Yes. Given $90 million on close to four here, it's not significant and we're comfortable with the 15 to 20, including the 53rd week.

Bryan Spillane -- Bank of America

Including the 53rd week in the base, okay.

Fran Rathke

It were just a clarification on the earnings side, we just want to make sure it was apples-to-apples.

Bryan Spillane -- Bank of America

And then also, is the amortization -- you're expecting more amortization add back next year than you had in this current year?

Fran Rathke

No. I think in terms of the amortization expense, it will be about the same as -- it should be about the same as this year.

Bryan Spillane -- Bank of America

Okay. And then, Larry, just -- the question is, as you look forward and your confidence in the 5% to 15% range for competitor -- unlicensed competitors within Single Cup, how much of the barrier to entry is just simply the cost it would cost some competitor to actually install the capacity needed in order to have -- there's a significant or a bit of a, I guess a moat around the business just because it's going to be a significant capital outlay in order to have that much capacity to have much greater share of the Single Cup market, and just how much of it is your view that at some point, transitioning to the view sort of gives you more exclusivity within Single Cup? I'm just trying to understand how much of your outlook is based on just simply how much capital requirement competitors would have to put in versus your view on transitioning to the new platform?

Larry Blanford

Bryan, thank you for your questions. We actually, I believe, have several moats around the business, one certainly being your thoughts on our manufacturing scale and economies of scale and size. And from that perspective, we continue to invest in our equipment, continue to work on increasing efficiencies and throughputs and quality. So just the scale required to serve this business is continuing to grow significantly, certainly is a factor in our competitive position. I would also say it's not necessarily as easy to produce these portion packs as it may appear, in other words to produce them in a way that work in a quality way with our brewers and to produce them in a high quantity and a high throughput.

Beyond that, of course, just quickly I would reference other moats, the 32 brands we now have in the system really differentiates us from any other system that's out there and I think is certainly a significant competitive advantage. And then, of course, as I mentioned I think in my comments, we're continuing to innovate -- this Company, the DNA of this Company is innovation and we continue to innovate. If I look at our R&D pipelines, they're fulsome and we're going to continue to bring new products on both the beverage side and on the brewer platform side to market. We're going to continue to innovate. And as we mentioned, the partners that we have in the system that are participating are in a position to leverage that ongoing innovation. So I think we have a number of moats that help us and give us confidence in our business going forward.

Bryan Spillane -- Bank of America

Okay, great. Thank you.

Larry Blanford

Thank you, Bryan.

Operator

And we'll go next to Akshay Jagdale of KeyBanc Capital Markets.

Akshay Jagdale -- KeyBanc Capital Markets

Good evening.

Larry Blanford

Hi, Akshay.

Akshay Jagdale -- KeyBanc Capital Markets

Hi. First of all, just congratulations on not only the quarter, but sort of your legacy here and it's good to sort of end off on a positive note, so, again, congratulations and good luck.

Larry Blanford

Thank you very much, Akshay. I really appreciate that.

Akshay Jagdale -- KeyBanc Capital Markets

Okay. And just going to -- I just want to focus on the longer term, if I may, in terms of my questions. So you have talked about 15% to 20% top line growth and I'm just curious to know if you can share with us how much of that growth you think is going to come from the three sort of platforms, the adjacencies, et cetera, that you outlined? So other than sort of base business, new product and new sort of innovation, how much of that sales growth would it represent? And maybe give us a perspective as to how much it has represented in the past? I mean, you've been an innovative Company. A lot of your growth has been organic and a lot of it has come from new products. But going forward, how much of the 15% to 20% growth is going to come from like the Snapple innovation, et cetera?

Larry Blanford

Yeah, Akshay, I appreciate the question. We haven't really broken out for our investors the kind of the split of our contributions from the various innovations as we go forward. I think I would just say in general terms for the very near future, obviously the K-Cup platform continues to drive our sales and earnings growth. I am certainly -- today we're obviously reliant on North America. Within the K-Cup platform, of course, we continue to bring in additional brands and we continue to innovate with new beverages and I think our non-coffee beverages today represent, I think, approximately 14%. Is that right T.J. roughly of portion packs? And we anticipate that that is going to continue to grow as we go forward.

As mentioned, we do envision that the consumer is going to lead the transition to the Vue system and I envision that that will really start to accelerate as mentioned as we get these lower price point Vue Brewers in the market. And I just would say again, in the longer term, I think we have significant innovation that will allow us to continue to generally drive growth. I'm absolutely not concerned about lack of innovation. That's not our issue. And it's prioritizing that innovation successfully taking to the market, and I'm very confident in that regard both in our two new platforms, Vue as well as the new Rivo product.

Akshay Jagdale -- KeyBanc Capital Markets

Okay. And just one follow-up, if I may, for Fran. For your fiscal '13 guidance, obviously you've maintained your sales growth guidance of a larger base, but your EPS, it seems to me based on your EPS guidance that you are now assuming lower EBIT margins than you were previously and my guess is that has to do with increased confidence in innovation and investing more or sort of keeping some money back for more investments for future growth. Am I reading that correctly? And if so, can you get into what these additional investments are?

Fran Rathke

Akshay, it's Fran. In terms of our guidance and we provided this on our last quarter call in terms of the next few years, we are continuing to -- comfortable with our 15% to 20% annual top line growth over the next few years and earnings growth more in the mid-teens which does indicate -- we anticipate some pressure on the operating margin and I think it was primarily due to some of the, if you will, the risk we're factoring into our plans and guidance such as the introduction of having some value pricing in our system.

Second is the introduction of some of the unlicensed participants and I think are responding to that, if you will, in terms of making sure we're competitive out there. And I also think a third item is continuing to invest in our growth with these new platforms and ensuring we're providing appropriate marketing support, brand support to really communicate to our future consumers about these platforms. We don't see it driving, Akshay, like G&A. I think that's something we will continue to see, we believe, leverage on. It's really more on the brand spend and then on the gross margin line.

Akshay Jagdale -- KeyBanc Capital Markets

Yeah, but I was talking more specifically last quarter versus this quarter, your fiscal '13 guidance seems to imply more of an investment whether it's lower gross margins or higher SG&A, I'm not sure, but it does imply a lower EBIT margin than previous fiscal '13 guidance. So I'm just trying to understand that, one, if I'm understanding it correctly, and so what changed?

Fran Rathke

I think in terms of what you're saying Akshay, you're saying in terms of the previous guidance of $2.55 to $2.65 versus $2.64 to $2.74 is implying that?

Akshay Jagdale -- KeyBanc Capital Markets

Yeah, it's implying EBIT margins that are lower than your previous guidance. But I may have it wrong. I'll just -- we can follow-up offline. I'll get back to you.

Fran Rathke

Yeah, we can -- we'll follow up. I think in general, it's the same theme that we had last quarter in terms of our guidance for '13 is we think we believe we're going to have some pressure on gross margins, as I said primarily just due to the mix of the portion packs towards the value pricing.

Larry Blanford

And then just we always -- also have the quarterly issues, like our first quarter, obviously, as you're aware, Akshay, heavily focused on brewers and of course, the lower or no margin on brewers. So Q1 of course gets impacted by that.

Akshay Jagdale -- KeyBanc Capital Markets

Great. Thank you.

Fran Rathke

Thanks Akshay.

Larry Blanford

Thank you, Akshay.

Operator

And moving next to Bill Chappell of SunTrust.

Bill Chappell -- SunTrust

Good afternoon.

Larry Blanford

Hey, Bill.

Bill Chappell -- SunTrust

Larry, best of luck as well.

Larry Blanford

Thank you very much.

Bill Chappell -- SunTrust

Just want to for Mike one question. Just trying to understand the progression on gross margin as we move up throughout the year and kind of maybe the progress you had during the quarter, in particular just trying to understand utilization rates and did you make some progress in improving that with your excess capacity? Then also green coffee costs I'm surprised that it's still that much year-over-year on the inventory side. I mean when do we finally work through that where we start to see the benefit as well? Thanks.

Fran Rathke

Hey, Bill. It's Fran. In terms of capacity utilization, this quarter that we just announced, we did see a slight sequential improvement over Q3 and Q2. We're going to, as we say, grow into our capacity and I think one thing that's a negative, if you will, on capacity utilization or having some downward pressure on labor and overhead rates is with Vue in the mix, we're still obviously scaling that over the next few years to get to about the same margins as we have enjoyed with the K-Cups. But I think we'll continue to make some improvements and we'll provide updates as we go through quarter-by-quarter for '13 for you.

Then on coffee, I think we had made commitments to procure coffee throughout last year, got a bit ahead of ourselves in terms of green inventory volume. So we're having to consume some higher coffee cost inventory right now. But I think the good news is, we tend to do, if you will, average daily cost buying on most and we tend to buy six to nine months out. So we've been throughout this downward trend on coffee cost, been buying. So I think what we have sitting in inventory now that we know will be consuming at lower rates and throughout the rest of '13, we'll see a pretty significant shift or benefit from the coffee cost especially Q3, Q4 in 2013.

Larry Blanford

Bill, this is Larry. Just on the capacity utilization, I just want to say that there is a tremendous amount of activity going on in our engineering and manufacturing organizations to improve efficiencies and utilization, and I'm optimistic that we're going to see benefits of that breakthrough as we move through the year. Although, as Fran pointed out, we still have the drag as we're working on improving the view lines. But I just wanted you to know we've got a lot of activity going on. That's an area of high focus for us.

Bill Chappell -- SunTrust

Okay. Thanks for the color.

Fran Rathke

Thanks Bill.

Larry Blanford

Thank you, Bill.

Operator

And our next question comes from Greg McKinley of Dougherty & Company.

Greg McKinley -- Dougherty & Company

Yeah, thank you and nice quarter.

Larry Blanford

Thanks Greg.

Greg McKinley -- Dougherty & Company

I wanted to maybe just follow-up on something you addressed at length last quarter and that is just the Company's belief that it has a much more comprehensive view of channel level inventories both at the Company, in the distribution chain, at retail shelves. How have, if at all have you further refined that what improvements if any have been made on that and how do you feel about channel level inventories where you sit today and where you think retailers sit today relative to forecasted holiday demand? And then I'm wondering also if you can just comment on, you made some announcements moving people into international leadership roles. I'm wondering if you could talk a little bit about what we should expect to see on that front in '13?

Larry Blanford

Go ahead, Michelle.

Michelle Stacy

Hi, Greg. This is Michelle. I'll answer the retail inventory. We've been monitoring very closely all of our top retailers and we believe that they are at a good level of inventory to support the holiday season. This is obviously a time period where they do add some week's forward coverage of brewer inventory to support the heavy December sales and we believe we're in a very good position with all of our key retailers.

Greg McKinley -- Dougherty & Company

Okay.

Larry Blanford

I would just add. Michelle and Scott both have been very involved in their teams and continuing to improve our forecasting through a trade flow model, which gives us much better insight into those retail inventories that Michelle was just talking about and we continue to improve that model and our confidence in the model continues to grow. With respect to your second question on personnel related to international, we did announce that Gérard Geoffrion who has done just a magnificent job in facilitating the integration of GMCR Canada into the enterprise is now in a new role, transitioning into a new role and that is International Business Development. Gérard has many, many years of extensive international travel, speaks multiple languages and has just really keen, broad business expertise, and I'm very excited to get him into that role. We've been doing a lot of work in the area for some time and I think Gérard now can bring the operational leadership to move us forward in some select international markets. So no announcements yet, but more on that later.

Greg McKinley -- Dougherty & Company

Okay. Thank you and good luck.

Larry Blanford

Thank you.

Operator

And we'll go now to Jon Andersen, William Blair.

Jon Andersen -- William Blair

Good afternoon, everybody. Thanks for taking the question.

Fran Rathke

Hi, Jon.

Larry Blanford

Hi, Jon.

Jon Andersen -- William Blair

For the first time I think this quarter you disclosed the impact of product mix on K-Cup sales as 2% I guess to the negative in the quarter. Does this -- I just want to make sure I understand what that metric reflects. Is that related to the price tiering work that you've done? Is it related to the growth of Parker brands and kind of just if so, how should we view that kind of going forward or is that something which you think kind of holds at current levels or has the potential to move positively or deteriorate from here? Thanks.

Fran Rathke

Jon, it's Fran. You are exactly right. It does include both; the price tiering driving down the average selling price a bit. As you noted, it's not a significant piece and then also it does include the mix that we have with the number of these partner brands where we sell to them at lower average selling price. So I think that's a combination of the two. In terms of the overall trend, I mean we have factored in some lowering of our average selling price that will be disclosed in our discussion on the change in net sales of portion packs, but I don't think it's going to be a dramatic change on -- but that --

Larry Blanford

Jon, this is Larry. I think the price tiering, I'm very pleased with at this point. So, yes, we will see some impact due to mix, but pricing generally is holding in all of our pricing tiers. We're very pleased with that. Promotional activity has picked up a little bit and still underneath what we might see in main coffee category, but it has picked up and so that impacts margins a little. On the other side going forward, I mean we have a lot of levers in terms of improving factory utilization and margins from other perspectives. So we'll see where all that's nets out. I think we've said before, we do have a lot of factors in the business, there's a lot of leverage up and down, and we do have a lot of flexibly to help manage the business and mange those levers to deliver the outlook that we've provided.

Jon Andersen -- William Blair

Terrific. That's really helpful. And Larry, I pass along my congratulations as well and best of luck in your future endeavors.

Larry Blanford

Thanks, Jon. I really appreciate it.

Operator

And we'll go to Mark Astrachan of Stifel Nicolaus.

Mark Astrachan -- Stifel Nicolaus

Thanks and good afternoon, everybody.

Larry Blanford

Hey, Mark.

Mark Astrachan -- Stifel Nicolaus

A few clarifications. On your partnership comments, are you saying that all of the current partner agreements including Starbucks don't offer anything else beyond one year from now? And then curious about why CapEx was below expectations in the quarter and why selling and operating expenses were also below sales in the Q4? And then it looks like you tapped the revolver in the quarter, so why was interest expense below expectations as well?

Larry Blanford

Okay. So I think we got four questions there. I've got first one anyway. So what we said on the -- in terms of partner brands, Mark, was that indeed, as we said before, our agreements with -- and we're talking on the beverage side, our agreements with beverage partner brands have been our multiyear and we indicated in my comments that if we look at the most important ones, they are still multiyear from this current point in time. So I think you've heard that correctly. Fran, do you want to walk around on the others?

Fran Rathke

Yeah. So I think just rattling -- so CapEx, why was CapEx down from our prior guidance? I mean when you look at our CapEx on the statement of cash flows, I think it's about $400 million and then also down below on the statement of cash flows, there is about $50 million to $55 million of CapEx acquisitions we made that are in accounts payable, so technically not a use of cash yet. So that's around $450 million our guidance -- prior guidance, was in the range of $4.75 or so and I think so slightly lower, but that's a tougher number to gauge when exactly that's actually going to be deployed.

Then two, I think you asked a question about interest expense or the credit facility, the indebtedness was up sequentially, so why would our interest expense have helped in terms of compared to our prior guidance? We had expected to borrow more. So I think in our estimates, we had expected higher interest costs. So that's why it helped compared to our guidance by probably about a penny a share. And then your third question was SG&A, you said what? Sorry, could you repeat the question, Mark, on SG&A?

Mark Astrachan -- Stifel Nicolaus

Sure. So it was basically the selling and operating expense number was up less than sales. I'm just curious why that was and just sort of maybe related to that, what does it mean in terms of the December quarter from a guidance standpoint top line versus bottom line?

Fran Rathke

Okay. So in terms of Q4, just to remind everybody, that's kind of in the summer season, we typically are not doing a dramatic brand spend. So that tends to be a quarter where we don't have as much going on from the brand sales and marketing. So as we noted on a GAAP basis or SG&A was up 17% with sales up 33%. So I think it was planned in our budgets and estimates and I think we did see some growth year-over-year in both selling and operating and G&A, but it's just -- it's not a heavy spend quarter in terms of the variable spend.

As we head into Q1, I do want to -- and maybe this goes back to Akshay's question specifically about Q1, as Larry pointed out, this is a very, very important quarter for us. This is when we really drive brewer adoption. So we are both marketing most importantly this year. We've got major campaigns going on for the K-Cup platform as well incrementally for the Vue platform. So we planned on a higher brand variable spend as a percentage of sales in our fiscal Q1 '13 compared to fiscal '12 Q1. So we are going to -- we believe, going to have a lower operating margin just due to that extra brand spend quarter-over-quarter. But I think we did do an excellent job leveraging SG&A this quarter on a higher sales basis.

Mark Astrachan -- Stifel Nicolaus

Thank you.

Larry Blanford

Thank you.

Fran Rathke

Thanks Mark.

Operator

And we'll take a question from Matthew DiFrisco of Lazard.

Matthew DiFrisco -- Lazard

Thank you. Larry, congratulations again also and leaving on a very high note there. Fran, I guess I'm trying to also just look at the guidance of the top line growth and trying to interpret that as far as the first quarter and the full year. If I look at the first quarter, it should be slower top line growth. Can you just sort of break out why that is slower than it would be in -- for the full year? Are you assuming that there's some pricing pressure or did you pull forward with that 53rd week, a bigger week of sales? I'm just curious why that little bit of the lower guidance 14% to 18% versus the full year 15% to 20%?

Fran Rathke

Okay. Thanks, Matt. So one thing that happened last year in Q1 is we had a – and if you look at our sequential trends in terms of the growth rate, Q1, Q2, Q3, Q4 of last year, you'll see Q1 last year was up tremendously. It was way higher than we had ever predicted going into Q1. It was up, I think, over something like 101%. The reason it was so high a growth rate, part of that was we were anniversarying the last quarter of not owning Van Houtte the prior year. So that when you sort of take that out of the number, it put the 101% something I think down to like 85%. So it still was a tremendous organic growth rate at 85%.

So we have a tough Q1 comp here heading into '13, so I think that's putting some of the pressure. It has nothing to do with an additional week, except I got say the $90 million in the last week of our '12 it is a very high sales week as we've heading once again into this holiday quarter. But it is more a -- because of a tough comp, so as you forecast out coming off of Q1 guidance it's probably somewhat more ratable on I would think at this point in terms of your modeling.

Matthew DiFrisco -- Lazard

I guess just dissecting that also your commentary suggests that I don't know if it's a full year or just the quarter, but that the brewer sales are going to maybe converge with the cup sales as far as the growth rate?

Fran Rathke

We don't really give out brewer -- I think maybe in our commentary, Matt, what we were trying to emphasize is we had a very, very successful campaign in October this year with a rebate. We've never really done that before on both the Vue platform and the K-Cup platform that has been extremely successful and drove exceptionally strong point-of-sale cash registered growth rates in the stores and I think -- what was it 93% up or something like that. So what we are trying to message tonight was please don't expect 93% is going to be the growth rate for the rest of the quarter. We're expecting a much lower growth rate coming off of this kind of special promotion, if you will.

Matthew DiFrisco -- Lazard

Sure. But again I guess that's a great head start though. Just not questions but clarification, if I could be at best. I think you said also in your remarks that it was implied that there would be some leverage. Is that in the full year as far as selling and operating expenses? I know the first quarter it sounds like you're going to do some brand spend but as a full year for '13, is that correct that I hear that you're going to have a leverage in that line item?

Fran Rathke

Matt, it's Fran. We anticipate we will continue to see nice leverage on the G&A line in fiscal 2013 compared to fiscal '12. And then on the brand spend we actually expect to be spending pretty similar to the rate of growth and in fact at a higher rate in Q1.

Matthew DiFrisco -- Lazard

Perfect. And then last question, your share repurchase it appears as though it came at the end of the quarter. So are we starting off as far as when we look at your earnings guidance, I would -- it almost looks like without assuming any further repurchase you're around 152 million shares outstanding?

Fran Rathke

Yeah and then I would add a little more for the year just due to normal sort of option exercises but that's a pretty good -- yeah, we bought -- it's in the -- the K is being filed momentarily, but it's in there. But relative to fiscal '12 we bought 3.1 million of the 7.4 million shares were bought in our fourth quarter. So it was pretty de minimis on our earnings in Q4 that we just released, but then the rest of it -- but that whole 3.1 will be outstanding for the whole year or helps the outstanding shares. And then we bought the rest of it, the $4.3 million in the early part of our -- so far this quarter.

Matthew DiFrisco -- Lazard

Excellent. Thank you very much for all the answers.

Fran Rathke

Okay.

Operator

And we'll take a question from Scott Van Winkle of Canaccord Genuity.

Scott Van Winkle -- Canaccord Genuity

Thanks. Larry, I'll also offer congrats on a finish to the career at Green Mountain, but more importantly to a less stressful 2013.

Larry Blanford

Thank you very much, Scott.

Scott Van Winkle -- Canaccord Genuity

I have a couple of questions. I'll try not to take liberty with the number, but first going into holidays this year, coming out of the holidays last year, you talked about a couple of impacts. You talked about the channel shift, more K-Cup obviously being sold to the supermarket and mass channels club, et cetera. And it also looked like there was kind of a de-load from the specialty retailers that sold heavily on the holidays with a big broad offering at K-Cups and then thin it out the rest of the year. Did you take any of that into account and how you merchandised this year for the holidays and should we see something different this year as a plan of attack going into the holidays as a result?

Michelle Stacy

Hi, Scott. This is Michelle and John Whoriskey and myself will answer the question. Cleary as we've come into this year, as we mentioned earlier, we're doing a much closer job of looking at our trade inventories and to make sure that they are at good levels throughout the holiday season, but not excessive and that has been really -- one of the things that we've been looking at as we come through this holiday season. In addition, we have continued to look at how we manage our channels in terms of sequence and cadence in terms of the promotional support we've been providing. And maybe John can talk a little bit about some of the holiday plans as we've gone forward through the season so far.

John Whoriskey

Hi, Scott. This is John. I would say too, our organization and our processes that we've now put in place and all of the joint business planning we're now doing with all of our key customers, so we're much further out planning now with our customers and we have access to all the inventory data and point-of-sale data on a weekly basis. So I would say we're just much more aligned with our customers and expectations and planning the business accordingly. So I don't think we're going to see the kind of fluctuations that we would have seen a year ago, and I think that's reflected in our guidance as well.

Scott Van Winkle -- Canaccord Genuity

Great. Thanks. And then a follow-up on a different matter, if I could. The finished inventory of K-Cups has been coming down. One, are you at your target level? And two, the reduction in inventory days on the finished K-Cups seems pretty significant from a year ago. Was there anything special in the quarter that allowed you to accomplish that?

Fran Rathke

Hey, Scott. It's Fran. I'm going to answer the target inventory level. We're at approximately five weeks on and I think that is an organization where we want to be. So I think we felt good about where we ended up at the end of Q3, continued to stay focused on that and I think we kind of closed out the year in that fashion. So I don't think there was anything unusual or herculean efforts to get there because I think we did a lot of that work in Q3…

Larry Blanford

This is Larry, just let me add. So there has been, which I think is really enabling initiatives on portion pack inventories, there has been -- going back to earlier this year a very dramatic philosophical change in the way we're managing our factories. And that really is to minimize working capital which means that instead of running and building inventory, what you attempt to do is to manage your capacity, labor, and equipment capacity to be able to ramp up in the busy season like now and then be able to ramp down as you approach spring and summer and really try to minimize the dollars that you have tied in working capital.

That is a philosophical change that has been accepted across all of our plants. We're driving it very hard and we could not really have pulled that off previously because we were scrambling so hard early on to get capacity. We were running everything we had round the clock full out. Now we have the ability to better time our factory and manufacturing schedules with the seasonal demand and that allows us to reduce inventory and still be able to meet the demand. So I think that's a major enabling initiative that's taken place.

Scott Van Winkle -- Canaccord Genuity

Larry, you mentioned there as well as the kind of fixed capital. How do you achieve being nimble in the summer season with meeting demand in the winter season when you have a very automated manufacturing process? Is there more labor in future manufacturing processes than there has been in the past, you go a little less automation? How do you accomplish that on the fixed asset side?

Larry Blanford

No, I think it really does get into scheduling the plants and how we manage labor. So as we approach this holiday season, as an example, we have more temporary labor in the plants working on the -- in positions that are not as technically as challenging as our operators that are full time. We have also developed the whole notion of a flexible workforce where there are employees that -- there's folks out there that want to work only six months a year, maybe from September through spring and then they want the summer off to be home with kids or to enjoy the summertime or to work a summer outdoor job.

So, we're doing a lot of creative things to be able to flex our workforce. And also from a manufacturing equipment standpoint, we really have done a lot to try to schedule all the heavy-duty preventive maintenance and downtime and efficiency improvements for the slower times of the year. So that when we get all that done, so as we then approach the busy times of the year, that equipment is available to run essentially full out. So that's how we're trying to manage it. And I think the plants are really doing an excellent job.

Scott Van Winkle -- Canaccord Genuity

Great. Thank you.

Larry Blanford

You're welcome.

Operator

And moving on to Marc Riddick of Williams Capital.

Marc Riddick -- Williams Capital

Hi. Good afternoon. Let me join everybody in congratulating you, Larry, on your retirement and certainly hope you have enjoyment there.

Larry Blanford

Thanks, Marc.

Marc Riddick -- Williams Capital

I was wondering if you could discuss a little bit the Eight O'Clock brand, because with that being sort of the value equation and opportunity in the channel, I was wondering if you could share some thoughts on retailer acceptance of the brand and give us a sense of what -- and how it's progressing thus far. As well as one other point if there's a difference across the country and how retailers seem to be receiving the brand, I'm not necessarily sure if that would be a Northeast bias on that, but I was wondering if you could share some thoughts on how Eight O'Clock is progressing?

T.J. Whalen

Hi, Marc. This is T.J. Thanks for your question. I would characterize the sell-in as successful. The different price point was warmly received by the trade. And as Larry suggested earlier, it allows us to speak to a broader demographic and with K-Cup Brewers being attractive to a mass audience, broadening the range of brands and price points that we serve K-Cup packs to that audiences is part of our strategy. Selling has been strong. I think you probably see Eight O'Clock K-cup packs rolling into most retailers across the country. Things are settling out in terms of their placement on the shelf.

I would say that I'm not aware of any instances where the cut-in on those products has been at the expense of any of our other preexisting products. It's fundamentally all incremental shelf space to us. Price points on the Eight O'Clock K-Cup packs are settling in. To be honest, there is some pockets of the country where they're probably priced a little higher than we would like and we would expect them to drift down over time as retailers get used to some of these new price points. But we're highly optimistic in terms of what the brand will do, and I think most of our retail customers would probably say something similar.

Marc Riddick -- Williams Capital

Thank you for the feedback. Would it be fair to say that we should expect maybe a different promotional cadence around Eight O'Clock than perhaps the other brands given the place that it happens to hold for the retailers?

T.J. Whalen

This is T.J. again. Thanks. I think overall what you'll see in grocery and mass is a continued uptick of overall merchandising and feature activities as single cup has become such a big success opportunity for them. You're looking at coffee category growth rates in the low single-digits, tea and cocoa category growth rates likely negative and then you're looking at Single Cup in the 70%, 80%, 90%. So retailers are really getting behind the entire opportunity. In addition to this price tier, you're seeing assortment expansion on shelf.

Now I think in measured channels what you're looking at is maybe somewhere in the order of 19% of the sales rolling through the coffee category being in the Single Cup format. And so naturally you see retailers excited to promote and feature such an extraordinary opportunity. As Larry suggested earlier, promotional support levels while up sequentially are still markedly lower than you would see in the coffee category in either bag or can form. So we view it as a very healthy dynamic. It's a sign of a vibrant category and the promotional levels, merchandising levels are consistent with our expectations and a signal that retailers are really supporting this extraordinary opportunity they have to drive growth.

Marc Riddick -- Williams Capital

Okay, great. And then my last one I promise. Now, do you think that's something that could actually be beneficial as far as moving over to the online channel because given the idea that this is sort of the front and center brand on that space, is that something that -- and maybe it's too early to ask this, but is that something that you think you would be able to see from an online ordering pattern standpoint? And that's my last one. Thank you.

T.J. Whalen

Yeah, I think if I'm not mistaken, we do feature Eight O'Clock K-Cups for our ecommerce website and I wouldn't expect the brand to perform differently necessarily in that online space than it would in the retailer environment.

Marc Riddick -- Williams Capital

Thank you very much.

T.J. Whalen

Thank you.

Larry Blanford

Thank you.

Fran Rathke

Thank you.

Operator

We'll take our question now from Tony Brenner, Roth Capital Partners.

Tony Brenner -- Roth Capital Partners

Thank you. I'll add my congratulations to Larry as well.

Larry Blanford

Thanks Tony.

Tony Brenner -- Roth Capital Partners

Most of my questions have been answered. I do have one remaining. You've referred to your partnership with Lavazza in developing the Rivo espresso platform a number of times. As a partner what if anything does that imply with respect to Lavazza's participation in the financial performance of that brand?

Larry Blanford

So in the relationship that we have with respect to the Keurig Rivo system with Lavazza, they fundamentally have provided in this particular case and are responsible for providing the brewer system and the espresso portion packs. So it's fundamentally their technology we have helped and contributed along the way. Our role in the relationship with them, the commercial relationship with them is to take that product to market. So it's distribution, marketing, merchandising, sales of the product. And it is I think -- we hope the first product of what we would expect to be along in profitable relationship for both Lavazza and for us working together in espresso in North America. We're very excited about the product.

There is just really nothing quite like it on the market in terms of being able to leverage real fresh milk out of your refrigerator to make outstanding espresso-based beverages. So it's a whole new category for us, Tony. It's one that we're really not participated in. And as we do more fully develop production capability and are able to expand distribution, we're very excited about the opportunity. I think there are a lot of consumers who are -- it's just very difficult to make those beverages at home. They're buying them away from home. I think we'll expand the category and I think we'll be able to get some of those -- the Away From Home consumption and bring it home and leverage it with the Keurig Rivo brewer.

Fran Rathke

I just wanted to provide maybe just some general housekeeping on this because we've had questions more on the investor side. So just so we're clear, we worked together with Lavazza to develop this system and on an ongoing basis, what goes on is they're in charge of the brewer manufacturing as well as the capsule.

Tony Brenner -- Roth Capital Partners

So they will manufacture it or they will just oversee…

Fran Rathke

They are essentially in charge of the brewer manufacturing and the capsules and then what happens is we buy them and then sell them and help market, and we jointly did a lot of the work to do the design. So we're really the marketing and distribution now on an ongoing basis of the product.

Tony Brenner -- Roth Capital Partners

I see. So you will report all the revenues and the cost from Lavazza will basically be your cost of goods sold, is that…?

Fran Rathke

Correct.

Larry Blanford

That's correct, Tony.

Tony Brenner -- Roth Capital Partners

Okay. Thank you.

Larry Blanford

Great. Thank you.

Fran Rathke

Thanks Tony.

Operator

And we have a follow-up question from Akshay Jagdale.

Akshay Jagdale -- KeyBanc Capital Markets

Hi. Thanks for taking the follow-up. I understand that the call is running late, but I can't resist since it's Larry's last call. So first question, Larry, you mentioned leverage and plenty of levers in the model. I wanted to focus a little bit on gross margins and over the five years that you've been with the Company and perhaps you could give us some perspective on what the initial plan was, but clearly sales seem to have far exceeded everyone's expectations, but gross margins really have come down right over that period and you're talking a lot about operational leverage. This year alone it was over a 200 basis point drag on your margins and I know the kind of work you guys have put in on the engineering side.

And so I'm just trying to understand like five years from now, ideally if everything works out the way you're planning, shouldn't the gross margins be higher and shouldn't that be driven a lot by some of the operational work you're doing? That's the first question. And the second one, I would really like you to share some of the research you said you alluded to regarding how brands matter and you said, I think brands matter -- your research has shown brands matter more so in the Keurig system than even in the coffee category overall, so if you could address those two, I'd truly appreciate it? Thanks.

Larry Blanford

I'll do the first one, and I think Michelle will probably pick up on the second one. Relative to gross margins, so you're not going to get me to project our gross margin five years out, but I will try to give you some sense. There's obviously several things working here. Let's start with the model, I mean, fundamental of a razor-razor blade model is that when you are selling, in this case, brewers fundamentally at cost that as the installed base of brewers builds, the demand for the portion packs on which we have obviously much better margins as a percent of your total sales grows, so just the fundamentals of the model, all else being the same, theoretically, you should see over time your gross margin growing.

We have been in the situation where these last few years, where the business has been growing significantly and so, we've actually had strong brewer sales growth, which have pulled down the gross margins at this juncture. But as we've said, we anticipate that the brewer sales growth, the unit sales growth will slow due to kind of the large numbers here. But the installed base will continue to build. I mean, if you were to just flatten the sales of brewers, you'll still see very significant growth here for a while of the installed base. And as brewer sales flow and as that installed base grows and demand for portion packs grows then that fundamental model is working in your favor.

Now, having said that, we're also though we're a growth Company, we're driving innovation, we're bringing new brands, beverage brands to market, we're bringing the Keurig Vue to market, the Rivo system and all those new products required not only investment in R&D, but obviously significant marketing investments that in the near term as you're making those investments, pull the margin down. So you may not fully see the power of the razor-razor blade model. In that you're masking that fundamental benefit with the investment you're making in these new products. Of course, you're making that investment because you believe in the long term the rate of return on those new product investments are significantly higher than you would expect to be higher than your cost of capital and would create value for shareholders going forward.

So there is a lot of moving parts, but I think the fundamental business model that we have built here over the last five years, which again starts with that strong consumer value proposition links that up with a mainstream recurring revenue financial model, the razor-razor blade model and then surrounds that with a partner model is truly outstanding and I think that at the end of the day, it's going to carry this Company forward for a number of years in a very profitable way. I will have Michelle address your second part.

Akshay Jagdale -- KeyBanc Capital Markets

Can I just follow up on that for one second, Larry? So I completely understand the mix shift. So the problem with the gross margin coming down is actually a good problem, your brewer sales are leading the way. I get that. But if you strip that out and we try to do that in our models, I'm sure you have better visibility. What I'm seeing is in the other part of your business, so excluding brewers, your margins are still not at what I'd call optimal levels and certainly this year they took a further step back because of high coffee costs and inefficiencies. So if you could just address that part of your business and you had talked initially about some of the operational changes or things you're focusing on in your plants, so am I right…?

Larry Blanford

Well, you're right. I think again I would just say there's a lot of moving parts to gross margin. So you got the core model, you got that mix of brewers versus portion packs, you got our investment in new products and then to your point as we talked about earlier, you certainly have what's going on in terms of factory utilization, as well as cost of raw materials most importantly green coffee, and certainly we did experience the very significant run up in green coffee cost as well as, as Fran mentioned earlier, we got a little ahead of ourselves as our forecasting model as we go back to earlier this year was projecting a bit stronger demand for the installed base of brewers than we had -- than ultimately was the case and we had to modify that.

So we got a fair amount of cost of money tied up in green coffee both at higher prices and higher volumes and we're working our way out of that. On the plant side, I've already spoken to a number of initiatives starting a very significant philosophical approach to running our plants and then there is many initiatives underneath that. So I'm not sure how to try to pull all that together. They are all significant factors. Obviously, we're working on all of them as we go forward to try to deliver the best gross margins that we can. Michelle, did you want to deal with the other?

Michelle Stacy

Yes. I believe your question, Akshay, was about the Keurig consumer and their preference or their likelihood to be more branded in orientation. When we look at the Keurig consumer, we find that they are households that tend to have higher incomes. They are on the upper half of the higher income spectrum. They are usually households that are slightly older in their age bracket, they have a 35 plus households and they are people who highly appreciate the taste of great coffee.

And that's what motivates them to come into the system is that they are very high coffee-involved individuals. And so they are really looking for the best tasting cup of coffee they can get, that's what motivated them. It's motivated them first of all to buying into a premium system. They are spending anywhere from $50 to $100 more for a coffeemaker than a traditional automatic drip coffeemaker. So they are willing to invest in the taste of the coffees.

And when you look at that that brings them to be much more engaged in choosing specialty branded coffees that will appeal to their taste and that gives them the choice of taste that they'd like to have over the course of the day. So we really do believe that our installed Keurig household base is going to be much more engaged in buying the branded coffees that they are already engaged with, that they are know and love, because that's why they bought into the system. They are not the price-sensitive loaded up, coffee-as-fuel households; they are much more the engaged coffee lovers.

Akshay Jagdale -- KeyBanc Capital Markets

That's helpful. Thanks.

Larry Blanford

All right. Thank you, Akshay.

Operator

And that concludes our question-and-answer session. I'd now like to turn things back over to Mr. Blanford for any closing or additional remarks.

Larry Blanford

Well, I just had like to thank everyone for joining us on the call this evening. Again, I appreciate your support of our Company and I appreciate your support of my leadership over these last five years or so. Thank you very much.

Operator

Once again, that concludes our conference. Thank you all for joining.

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