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Executives

Suzanne DuLong - IR

Brian Kelley - President and CEO

Fran Rathke - CFO

Scott McCreary - President, Specialty Coffee Business Unit

Michelle Stacy - President, Keurig Business Unit

Sylvain Toutant - President, Canadian Business Unit

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

John Whoriskey - VP and General Manager, U.S. Commercial Operations, Keurig Business Unit

Analysts

Matthew DiFrisco - Lazard

Akshay Jagdale - KeyBanc Capital Markets

Bill Chappell - SunTrust

Scott Van Winkle - Canaccord Genuity

Jon Andersen - William Blair

Mark Astrachan - Stifel Nicolaus

Greg McKinley - Dougherty & Company

Bryan Spillane - Bank of America Merrill Lynch

Tony Brenner – Roth Capital Partners

Alton Stump – Longbow Research

Mark Riddick – Williams Capital

Akshay Jagdale – KeyBanc Capital Markets

Matthew DiFrisco - Lazard

Green Mountain Coffee Roasters (GMCR) F1Q 2013 Results Earnings Call February 6, 2013 5:00 PM ET

Operator

Good afternoon and welcome to Green Mountain Coffee Roasters Incorporated fiscal 2013 first 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, operator, and welcome, everyone. Today's press release is available on our website at www.gmcr.com. We have posted slides that summarize and supplement much of the information we’ll discuss on this call and also capture much of the information previously provided in our supplemental prepared remarks. As a result, we will not publish supplemental prepared remarks to our website this quarter. Our Form 10-Q for the period also is available on our website.

On today’s call Brian Kelley, our president and CEO, will provide some brief introductory remarks. Fran Rathke, our CFO, will discuss aspects of the quarter's financial results. Brian will then provide some additional commentary about the business and its opportunities. We'll then open the call to questions from the sell-side analysts.

Several members of our management team are with us for today’s Q&A session, including Scott McCreary, president of the Specialty Coffee Business Unit; Michelle Stacy, president of the Keurig Business Unit; Sylvain Toutant, president of our Canadian Business Unit; T.J. Whalen, our vice president of marketing and sales for the Specialty Coffee Business Unit; and John Whoriskey, vice president and general manager of U.S. commercial operations at 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 Brian Kelley.

Brian Kelley

Thanks, Suzanne, and good afternoon everyone. I’m very pleased to be with you today on my first call as GMCR’s CEO. Our first quarter performance was very strong, driven by the Keurig brewing system, its steady and strong consumer acceptance over what is now many years, and the value inherent in our open-brand portfolio.

On a non-GAAP basis, a measure that we feel best reflects the underlying performance and health of the business, we delivered earnings per share of $0.76, an increase of 27% year over year. We also generated $254 million in free cash flow, driven by a 16% lift in revenue. In addition, our results included a 25% improvement in gross profit, and a 23% increase in non-GAAP operating income.

We’re very pleased with these results, and I’d personally like to thank the dedicated and passionate GMCR team members who delivered this performance. As I visited with employees across our facilities during my first 60 days, I was continually struck by their passion for our business and their drive for excellence, which will be instrumental to our continued growth.

Today I’m very proud to be sitting here alongside key members of our senior leadership team, and in a moment, we will give you more detail and color around our results and our expectations. As part of that discussion, I will speak to what brought me to GMCR, what I’ve seen in my first 60 days, and then I’ll address what I see as some of the truths and myths about this business. I’ll conclude with my view of some key opportunities.

Before we start, however, I’d like to personally thank my predecessor, Larry Blanford, who led the company for most of the quarter. Larry and I were able to engage in a very smooth, productive, and thorough transition, and I want to thank him for his time, his wisdom, and for all he’s done for this company over the last five and a half years.

So with that in mind, let me hand the call over to Fran for a review of the quarter’s financial highlights. Fran?

Fran Rathke

Thank you, Brian, and hello everyone. We were very pleased with our overall 16% revenue growth, driven primarily by our single-serve pack growth of 21%. Given the softer-than-anticipated Christmas season for retailers, we were also pleased with our brewer and accessory net sales growth of 14% and the resulting installed base growth.

Let’s move to a review of gross profit. We saw a 220 basis point improvement to 31.3% of net sales versus 29.1% in the prior year period. This was largely due to lower green coffee costs, lower warranty expense, and lower sales returns. Today’s press release includes a table that outlines all the year-to-year changes in gross margin and I’d ask that you look there for the details.

Two things I’ll call out from the table. One, there has been very little price degradation in single-serve packs. Two, the decrease in warranty expense provided a benefit of 130 basis points. This was a direct result of our efforts to continuously improve brewer quality, which resulted in lower warranty claim trends. In line with these demonstrated trends, we have incorporated the lower rate into our product warranty reserve estimate.

Turning to operating expenses, as we indicated when we reported our fourth quarter earnings, Q1’s SG&A expenses were up over the prior year period as a result of increased advertising, promotion, and marketing related investments.

As a percentage of sales on a non-GAAP basis, SG&A was 15.8% in the first quarter, roughly in line sequentially with the fourth quarter last year, and up from 15.4% in the prior year period. Specifically, related to to holiday quarter, we saw an additional $22.1 million of advertising, promotion, and certain marketing expenses during the quarter, as well as $16.1 million of additional salaries and related expenses over last year.

Excluding advertising and other brand-related spend and performance-based compensation expenses, SG&A grew just 8% against 16% revenue growth. Net cash provided by operating activities during the 13-week period was $337.1 million, as compared to $132.1 million for the same period last year.

Our $254 million in free cash flow was due to a combination of factors, including typical business seasonality, which leads to a decline in brewer inventory in Q1, as well as strong net income and favorable accounts payable timing. We expect to generate additional free cash flow in Q2 in line with our typical pattern. However, we also expect to again build brewer inventory in the back half of the year to meet anticipated seasonal demand.

Finally, on our share repurchase program, we were not active since November 27, but as to future repurchases, we are always evaluating the best uses of our capital and will continue to make smart allocation decisions that put our shareholders in a position to realize long term value.

Turning to our outlook for the second fiscal quarter of 2013, we anticipate total net sales increase in the range of 14% to 18% from the year ago period, driven by continued strong single-serve pack growth.

Incorporated in our estimate is an expectation that Q2 brewer shipments will decline slightly year over year, while POS will continue to grow. Remember, even with the brewer shipment decline in Q2, we will still grow our installed base of brewers in the quarter, which is the driver of future single-serve pack sales.

We expect non-GAAP earnings per diluted share in a range of $0.70 to $0.75 in the second quarter, excluding the non-GAAP items as noted in today’s press release.

For the full fiscal year, we expect total net sales growth in the range of 15% to 20% over fiscal 2012, driven primarily by increasing single-serve pack sales. For the year, we expect our brewer unit shipment and POS growth to be in the mid-single digits.

And our outlook incorporates the expectation that our brewer base at the end of our fiscal 2013 is likely to be in the range of $16 million to $17 million, illustrating the magnitude and consumer acceptance of our tiered brewing platform.

We have increased our non-GAAP EPS estimate to a range of $2.72 to $2.82 per share, excluding the non-GAAP items as noted in today’s press release. We are lowering our estimated capex to a range of $350 million to $400 million from our prior range of $380 million to $430 million.

This revised capex represents approximately 8% of 2013 forecasted sales, down from 10% of sales in 2012 and 11% of sales in 2011. The reduction in anticipated capital investment likely puts us at the top end of our estimated free cash flow range of $100 million to $150 million.

One final thought: It is important to remember that fiscal 2013 is a 52-week year, where fiscal 2012 was a 53-week year. Therefore, on an apples-to-apples basis, we expect our non-GAAP EPS growth rate in fiscal 2013 to be in a range of 17% to 21%, which, at the high end, is above our longer-term earnings guidance for growth in the mid-teens.

And now I’ll turn the call back to Brian.

Brian Kelley

Thanks, Fran. As this is my first chance to speak to this audience since joining GMCR, I’d like to broadly address the three key points I mentioned at the opening of today’s call. First, what attracted me to GMCR, second, what I’ve learned in my first 60 days, and then finally, I’ll talk to some near term opportunities and processes for establishing our strategic priorities going forward.

I’ll begin with what attracted me to GMCR. And there were really five key factors. First, the Keurig single-cup brewing system is a disruptive technology that has transformed the coffee business, and I’ll talk much more about that as the call goes on.

Second, the business model works. GMCR is leading coffee industry growth today. We’re profitable, and we believe we can continue to be so well into the future. Third, our unique approach to our brand portfolio and to our partners’ brands within the Keurig system is a real advantage for us. Fourth, we have a high caliber of talent, both at the company and the board level. And fifth, the company’s ethos and values reflect those of today’s consumers and are very compatible with my own.

And I’ll talk to each of these in turn. First, on the Keurig system, the Keurig single-cup brewing system was a powerful breakthrough for the hot beverage categories, with significant untapped potential in the U.S. and around the world. As many of you know, it started as a unique combination of Keurig’s advanced brewing and dosing technology, coupled with Green Mountain Coffee’s specialty coffee expertise.

And at the intersection of this advanced technology and coffee knowledge, the two capabilities, once merged, cultivated a very rich source of consumer insights that enabled them to develop powerful products and solve many of the historic tradeoffs consumers experienced with hot beverages prepared at home.

And what’s clear from the numbers is that Keurig’s proprietary technology has generated extraordinary appeal with the consumer. Reading the passionate and glowing consumer blogs and posts, tweets, and letters is unlike anything I’ve ever seen. Once consumers experience the Keurig brewer, they feel they can’t live without it.

The Keurig experience has fundamentally changed consumer behavior in the coffee business, and in doing so, it has actually created a new route to market for beverage brands. Within the Keurig platform, brands can be built differently, more quickly, more cost-effectively, more efficiently, and more personally than ever before.

And over the years, my experience has taught me this: The company that best understands the demand signal in the home - that is, the detailed dynamics of how consumers consume at home - has an advantage and usually wins.

And I believe we are in the very early days of a powerful evolution in how consumers purchase, prepare, and customize beverages in their home and the Keurig brewing system is well-positioned to lead this evolution.

The second reason I’m here at GMCR is that I believe the business architecture works. The basic dynamics are clear. We grow the installed base of brewers, and then deliver the best-tasting beverages conveniently at home, or in the office, through our single-serve packs, profitably.

We have a strong, functional value proposition for consumers and partners, we have a powerful emotional appeal, and an exciting innovation pipeline that can, as a whole, deliver attractive financial results.

So as I reviewed the company’s estimates of its installed brewer base and single-serve pack growth, I quickly became comfortable that the company’s estimates were realistic and that the fundamentals of the business strategy were sound.

The third reason I joined GMCR is that I saw a demonstrated capability that is both rare in consumer packaged goods and key to our success, and that is the ability to partner with very powerful beverage brands while at the same time building our own premium brand portfolio.

With the Keurig brewing system, we have successfully fostered the extraordinary growth of a controlled multibrand system, building a portfolio of our own brands while successfully partnering with other world-class brands to create the powerful Keurig system.

Consequently, we offer extensive brand choice and the best of all worlds to the consumer. The ability to identify and build mutually beneficial relationships with partners with whom we also compete is simply a part of GMCR’s DNA, and it’s a real advantage.

Fourth, I was struck by the high caliber of talent on the leadership team and the board of directors. This team has overcome a number of difficult challenges while remaining focused on executing a well-defined strategy, and it’s working, although, like many and most fast-growing companies, the rapid expansion over the last five years was bound to lead to some growing pains, and it did.

But it never caused them to veer from their vision or their values. They were quick to recognize and deal with most of the critical growth-related challenges and stay focused during a period of extraordinary external scrutiny. Evidence of this is our performance over the last couple of quarters, as well as the fact that respected executives like Norm Wesley and Dave Mackay have joined the board of directors.

Finally, I was taken with the ethos of the company, the integrity of our people, and the ingrained desire to do the right thing with our products, throughout our supply chain, with our people, and in our local and global communities.

Consumers today buy a company’s values as much as they buy a product. This is particularly true of younger generations of consumers around the world, and as we take GMCR to its next phase of growth, our values will continue to reflect positively on our brands, and will mirror the value of our growing consumer base, just as they do today.

GMCR has long understood the crucial link between being a great place to work, a good global citizen, and delivering great financial results. This is a company that isn’t just talking the talk. We’ve been serious about sustainability and about being a great place to work for more than 30 years.

Now, while all of the points I just mentioned factored heavily into my decision to join the company, there’s only so much you can learn from the outside. Now, a little more than 60 days in, I can easily say that I’m more excited than every by the opportunity at GMCR, even versus when I accepted the role.

I’ve spent the last two months diving deeply into every aspect of the business, and getting to know the details of our strategies, our customers, our partners, and our operations. And although we have much more work to do in terms of the review, here’s what I’ve learned thus far about some of the truths, the myths, and the opportunities for GMCR.

First, a few of the facts as I see them. Our innovation pipeline is one of the strongest I’ve ever seen. Our R&D, technology, and engineering teams are strong and capable. I know that if we can execute the initiatives in our pipeline on time and with excellence, we will continue to excite our consumers, our customers, and our partners.

Next, the Keurig brewing system is powerful, both as an advantaged product platform, as a brand equity, and as a brand-builder. I believe this strength will allow us to eventually expand into new categories, new occasions, and new beverage day parts. And we will work closely with partners to do that over the long run.

Our Green Mountain Coffee brand and its values are a real competitive advantage for us as well. Now, the Green Mountain Coffee brand also serves as an excellent example of how brands can be built within the Keurig system. I know how hard it is to build a billion dollar brand in the beverage business, and this team has accomplished it in a relatively short timeframe.

The Green Mountain coffee brand went from less than $300 million of revenue in 2007 to well over a billion dollars in annualized revenue today. This is illustrative of what the Keurig brewing system can do for great brands.

In addition, our financial controls are solid. There have been extensive internal and external audits which have validated and proven the integrity of the company’s control process. Where necessary, our approach has been streamlined, and complexity has been removed. And processes and controls have been augmented still by the addition of a chief accounting officer as well as other finance and accounting staff.

Finally, our talent is very strong. We have a highly capable, hard-working, passionate group of team members who care deeply about our company, and they want to win. It’s been a real pleasure to get out and meet most of them in nearly every one of our facilities in the U.S. and Canada in my first 60 days, and I have the utmost confidence in their abilities and in their values, and I’m proud to be part of the team here.

Now, there are also some perceptions about the company that I’ve dispelled myself as myths. And I dispelled them as myths for myself. First, although a legitimate initial concern for many of our stakeholders, the impact of our K-cup pack patent expiration last year appears largely exaggerated, and not nearly as dire as some feared.

In fact, it turns out that it wasn’t really the patent that was protecting the strength of the Keurig system. The patent just gave us a head start, which is exactly what patents are intended to do. The real protection has been in offering a better product, with superior quality.

It’s in the mass and scale which gives GMCR a better cost structure. It’s in the ability to partner successfully with strong brand partners. It’s in a broad distribution system that took years to build. It’s in having a multimillion household installed base, and it is in the ability to mine customer insight and to target continued innovation with the unending goal of delivering new solutions to consumers, customers, and partners over time.

I would also note that achieving the scale, cost, and quality advantages that we enjoy today is not easy for others to replicate. That applies to our brewers, our manufacturing infrastructure, our packaging equipment, and our installed base. It also applies to our K-cup pack and Vue pack designs, and execution, as well as our beverage R&D expertise. We’re not perfect, of course, but our goal is to get better in each of these areas and over the long term I believe we will.

Now, another area that’s been talked about quite a bit is the sustainability of our partner network. Here’s the reality: partnerships have to be earned through hard work, trust, and mutual benefits. Today we have 32 strong brands in our system that represent a large portion of the at-home coffee business in the U.S. and much of its growth. We believe we are a key element of our partners’ business strategies, and know we have to drive value for all of them. And they know they have to bring value to us.

This two-way street isn’t talked about enough. In terms of specifics, the largest brand in our Keurig system by far is our Green Mountain Coffee brand. Beyond Green Mountain Coffee, we have seven brands in our system that each represent between roughly 4% and 7% of our single-serve pack revenue in our fiscal first quarter of 2013.

And by the way, although we won’t provide this information quarterly for competitive reasons, I can tell you today that four of these seven brands we own. The other three are Starbucks, Newman’s Own, and Folgers.

The 32 brands in our Keurig system are powerful, well-crafted coffee and other beverage brands that make our system the best in North America. And the growing Keurig system makes each of these brands stronger. This is how partnerships work, and we’re committed to growing our system and adding value to our partners’ business prospects every day.

In summary, I’d say that the strategy at GMCR has been very well defined and conceived, and while I don’t expect any wholesale or abrupt changes, we will look for every opportunity to sharpen it, focus it, and make it even more competitive. To that point, we’re in the process of a complete and thorough review of our key business strategies, and we would expect to be able to share relevant specifics over the next three to six months.

Preliminarily, however, we have identified a number of opportunities where we know we can improve. First, we know we can become more operationally efficient and consistent. The rapid growth we’ve experienced over the last few years has left a number of opportunities to improve our plants, distribution, transportation, procurement, and our overall cost base. Over the next two to three years, you can expect operational improvements in these areas.

Second, we know we can dramatically improve our in-store presence to reduce out of stocks, to have better price pack architecture, to significantly improve our shelf and merchandising presence, to make it easier to for consumers to shop the category and to have a clear look of success that profitably grows all of our system brands with retail partners.

Third, we’ll work to sharpen and increase our marketing effort to further strengthen our core brands, Keurig and Green Mountain Coffee. We need more firepower behind these brands in the marketplace to keep them fresh, relevant, and part of the daily conversation. Word of mouth endorsements for Keurig is one of our biggest advantages, and we’ll continue to foster and grow it.

Fourth, we’ll continue to drive the success of our Vue technology with new brewers, better features, new beverage products, and a strong marketing effort. The Keurig Vue platform represents the best of our technology, and will continue to be a key focus as part of a strong portfolio of brewers incorporating the best technologies at the best price points.

Finally, we know we have a significant opportunity to grow, in current channels like away from home, in new channels, in new categories, with new brewer technologies, and in new geographies. But we must prioritize them and execute flawlessly the ones we choose.

So we have a lot of work ahead of us. But to be clear, the opportunities we pursue will have a financial [end game]. First, we’ll have a keen focus on free cash flow, and we’ll look to improve returns on invested capital and capacity utilization on a plant by plant, line by line basis.

On the P&L in 2013, you should expect direct marketing expenses to grow ahead of sales in an effort to build further passion for our brands among consumers. You should expect R&D expenditures to grow ahead of sales to ensure we consistently deliver the highest quality, most innovative brewers and beverages in the world, and that our new launches, in single-serve packs and brewers, are well executed.

On the other hand, we plan to grow operating expenses slower than sales, and that will drive leverage in our model. To balance investment and ongoing profitability, we will likely reinvest much of what we save in growth and capability. Finally, if we execute this plan like we believe we can, we would expect to see continued non-GAAP operating margin improvement in 2013.

I look forward to getting out and meeting many of you over the coming months. I’ll ask for your patience as we complete our strategic review that I mentioned earlier in my remarks. Our goal is to continue to build a great company for the long term that can deliver for our consumers, customers, partners, and our employees as well as for our communities and for our shareholders.

Thank you.

And now Operator, we’ll take questions from the sell-side analysts.

Question-and-Answer Session

Operator

Thank you. [Operator instructions.] And we’ll go to Matthew DiFrisco from Lazard.

Matthew DiFrisco -- Lazard

I just want to make sure that I understood it correctly. I think you said, even though you didn’t change your free cash flow estimate, you did lower your capex number and raised EPS. I’m just wondering why the range in the free cash flow estimate wouldn’t have been upwardly revised. Or are you just saying you’re narrowing it to the higher side? I didn’t hear that clearly.

Fran Rathke

As you summarized at the end, is essentially we’ve relooked, obviously, at our estimates for free cash flow based on the revised capex and earnings guidance, and I think what we expect now is to be on the high side of the range we had previously given of about $100-150 [million] at the higher end.

Matthew DiFrisco -- Lazard

I would have just thought that you would have come out with a new range, or at least taken away the lower end, since you improved your EPS outlook and lowered the capex.

Fran Rathke

I think as we wrap up another quarter, we’ll update our range as appropriate.

Matthew DiFrisco -- Lazard

And just a comment with respect to declining brewer sales, declining brewers, in Q2. I think you said that will not be what you would expect to see at the point of sale this quarter? It looked like there was a good correlation between what was being reported from the point of sale. Or unless you have different data. Can you put in relation what you saw for point of sale as far as your 18% or so shipments?

John Whoriskey

We are projecting single-digit growth in point of sale for the upcoming quarter.

Michelle Stacy

I’ll build on that. During Q1, we saw that our brewer shipment sales were slightly ahead of our point of sale numbers, and that has left us with a little bit of inventory that we’ll work through in the second quarter, and that’s what’s driving the brewer shipment year over year declining in Q2. While we will continue to see an increase in the point of sale in Q2, and that will result in an improvement in our overall installed base, which of course drives the portion pack portion of our business and our overall value.

Matthew DiFrisco -- Lazard

And then last question, I missed what you said as far as your guidance within that overall revenue number for Q2, for the portion pack growth.

Fran Rathke

We didn’t specifically give guidance for portion pack sales in Q2. It’s just factored in. We did indicate we anticipate a slight decline in the brewer sales in Q2, quarter-over-quarter. But we gave the guidance for the top line growth of 14-18%, in dollars. So that’s got single-serve packs in there.

Matthew DiFrisco -- Lazard

Understood. But I guess if we’re going to make that assumption, then should we assume a similar dynamic between what you saw in this last quarter as far as volume and average price? Or is the average price something that might continue to come down?

Fran Rathke

You know, I think we’re just factoring in some of the price tiering that we’ve got in our business in the quarter, in Q2, in our estimates. I think overall, we feel our customers are in a good position in terms of weeks on hand on single pack inventories, as well as our own inventory is in really good shape at just about four weeks on hand. So I think we don’t anticipate any slowdown in the portion pack growth. And we don’t expect to see significant degradation in price, but we’ve got some of that factored in, as we saw about 1 percentage net price realization this quarter.

Matthew DiFrisco -- Lazard

And I guess I’d feel remiss if I didn’t ask a question of Brian on your first call. Welcome. You did a great job, I think, detailing all of the priorities you have set out. You gave a couple of timelines. You said the operational efficiency, two to three years improvement. But I guess looking at the better in-store presence, that sounds like something that might be able to be achieved quicker, or at least in steps, and have some sort of impact in the near term. Is that true? Do you think there’s some low-hanging fruit that you could address quickly as far as the in-store presence, to have an impact in maybe a nearer term than a couple of years?

Brian Kelley

Well, we have not factored in any of those into 2013 numbers. Any of those operating improvements. Can some of them happen faster than others? Yes. I wouldn’t give you any specific timing yet. We’ll begin immediately on them.

And some of the on-shelf activity, as you well know, we work with our retail partners and we’ll work to make sure, first and foremost, we’re in stock. That’s most important. And improving our look on the shelf, improving our ability for the consumer to effectively shop the category. It’s really important that we improve that. And we’ll get on that right away. But we’re not counting on big numbers from that in 2013.

Operator

We’ll now go to Akshay Jagdale from KeyBanc Capital Markets.

Akshay Jagdale - KeyBanc Capital Markets

First one is for Fran. Just again, I want to make sure I understand your guidance. You raised the EPS guidance by $0.08. I’m estimating about $0.04 of that was because of the repurchase and new share count, and about $0.04 came from operating improvements. Is that roughly correct?

Fran Rathke

No, it is not. When we gave our guidance last quarter, and it was getting close to the end of November, we had already repurchased all the shares that are factored into the estimate we provided for this past Q2. So that ended up helping our earnings per share in Q1 by about $0.03, and that was already factored into our guidance. So as we looked for the rest of the year, when we’ve raised by $0.08, that is strictly earnings growth. It does not anticipate, in the estimate, any additional share repurchases at this time.

Akshay Jagdale - KeyBanc Capital Markets

Then, just following on, I think one of the things that people are going to look at in this quarter and hopefully we can get some additional guidance from you on this, is the K-cup sales growth, you know, very solid, 21%, 26% volume growth coming off of a pretty tough comp. But it is a slowdown. And it is lower than the implied change in the installed base. It could be construed as Green Mountain losing share.

So I don’t know how you can answer that, but in my opinion, you know, it looks like there wasn’t too much competition, which is being in that 1% price decline that you have reported. But it’s just hard, with all the seasonality and the price changes from last year. What I see is the attachment rate has stabilized over the last three quarter, and sequentially actually went up. But can you just help us understand, should we, over the long term, expect K-cup volume growth to be in line with the installed base growth, roughly?

Brian Kelley

Over the long term, yes. You should expect that. It’s hard, I think, quarter to quarter, to be able to match it exactly, because it comes in at different times in the quarter. The installed base grows at different times. And in a different path over the quarter. So if you look at the 26% unit growth this quarter, it was strong. We were hurdling a very, very good first quarter of last year.

And so if you look at that hurdle, we know that it’s good growth. We feel very good about the 26% growth, and we expected the mix. As you saw, the 21%, the bridge there with 4% in mix and 1 point in price. We’re comfortable with that, and it was expected. So I think you’re going to continue to see that kind of level of K-cup growth, and I also think, over time, you will see it match installed base growth. We don’t anticipate an attachment rate decline. In fact, we’re going to do everything we can to improve it, but that’s not a simple thing to do.

Akshay Jagdale - KeyBanc Capital Markets

And just following along those lines, in terms of the initiatives that you laid out, five of them, can you rank that in order, or give us a sense of where you think you can have the biggest impact the quickest? Or are they sort of equally weighted?

Brian Kelley

It would be probably premature to tell you which one is weighted more heavily. They’re all going to be important. We’re going to work on each of them. Some will have a quicker impact than others, but we’ll give each of them a thorough effort, I can assure you that. And I’ll also tell you that when you look at some of the things that require work with others, with partners, with our retail partners, some of those take time to work through, because we want to do it in a mutually beneficial way. Some of the things that are of our own accord to do in our plants, some of those can happen more quickly. But we’re going to work on all of them, so I don’t want to presuppose a prioritization at this point.

Akshay Jagdale - KeyBanc Capital Markets

It was very helpful that you gave us those numbers on your partner brand. I think that’s helpful. Another thing that could be helpful, maybe you can answer today, is point of sales data for K-cups. We all see the data for grocery channel, and I’ve estimated it’s roughly 35% of your volume mix. And there’s a whole 65% out there that we really don’t have visibility into. Can you just help us understand what happened in the point of sales growth this quarter? Is the category growing at 24%, and you grew at a similar rate, and you were just lapping a very tough comp? Did you lose some share? Did you lose more than you expected? Any help there would be really great.

Brian Kelley

Let me address it quickly, and then I’ll turn it over to TJ. First of all, the grocery piece is a small portion of the total that we’re looking at, and so when you look at IRI data, remember that that’s only a portion of the total. In terms of did we see others and unauthorized packs grow, we did. But TJ, why don’t you provide a little more color?

T.J. Whalen

I think probably most of us take a close look at IRI or Nielsen on a monthly and quarterly basis, and you can see that what’s being sold down the coffee aisle now is 25-plus percent of that volume is single-cup portion packs. Obviously the growth of single-cup packs dramatically exceeds that of any of the other subsegments in the category, and so we’re continuing to expand share there and we feel very good about our placement. [HVV] numbers are strong. We’re up to about 94-95%. That’s up 6 percentage points in the prior year.

Items on shelf continues to grow robustly as well, despite the additional entrants in the category. I think if you’re keeping an eye on things, you’d see nationally about 29 items on shelf across the country with our own products and our own brands. That’s up about 10 items year over year. And then of course there’s still some geographic SKUs to that with about 45 items on shelf in the Northeast, which, by the way, continues to grow robustly with 9 items of growth there year over year. So we feel great about what you’re seeing in measured channel, and that to me signals the overall health of the system.

Brian Kelley

It’s also clear the pie’s growing, and what’s happening is we have a very, very large portion of that growing pie, and we’ve said before we expect that there will be others who come in and we’re going to still do quite well. It’s about the quality of the product, the quality of the brand, and that’s really, ultimately, what’s going to drive success.

Operator

We’ll now go to Bill Chappell from SunTrust.

Bill Chappell - SunTrust

Can you talk a little bit about just your outlook for either the price degradation or kind of the trade down on the mix over the next few months? I’m just trying to understand if that’s just you reinvesting, or the new pricing structure utilizing kind of the lower green coffee costs, or if there’s something else that’s really pulling that down.

Brian Kelley

Let me try to address it, and then we can have others in the room get into more detail on it. Much of what we saw in this quarter was planned. If you look at the tiered pricing we have that we introduced really recently, we knew that was going to change the mix, because as we brought a couple of the more strong value brands in, we knew that was going to change the mix. And that’s predominantly what you saw in the difference between the 26% and the 21%.

And so if you look at that, that was planned. And I would expect that that would continue. You’ll see a very similar kind of mix impact and price impact that you saw in the first quarter, which we expected, and which we think is good for the overall Keurig system. We have brands in the system that have a range of pricing, a range of value, and we think that’s healthy for the system, because we want something for everyone in the Keurig system, and we have it.

Bill Chappell - SunTrust

Did the move into doing Costco’s private label have a meaningful impact on that number? And with some of the product issues of competitors, are you looking to do more private label over the coming months?

Brian Kelley

To answer the first question, it did not have a significant impact. It’s a terrific partner, and we’re happy to have the brand in the system. But it didn’t have a significant impact in that. In terms of the others, maybe somebody could comment on do we want to look at other private label brands.

We actually think of it this way. There are great brands, and whether they’re owned by a retailer or they’re owned by someone who’s not a retailer, we want great brands in the system. And if we see great brands, that happened to be owned by a retailer, and we want to bring them in, we’ll bring them in. But that’s how we see it. And there are a number of brands that are owned by retailers that we think could be beneficial in our system.

Operator

We’ll now go to Scott Van Winkle from Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

You talked a lot about, obviously, the measured channels and such. Can we shift a little bit to the away from home office channel and get a snapshot of kind of where that stands today, when you think about this continuing shift in the mix?

T.J. Whalen

Glad to see some focus on AFH, which is a really critical channel for us, both in terms of volume profit contribution and in terms of visibility and sampling. We don’t report specifics on those channel dynamics, but I can tell you that the channel is growing, it’s healthier than it has ever been, that we are continuing to increase brewer sales year over year, robustly. And that is, of course, continuing to increase portion pack sales in that channel year over year, robustly.

And perhaps the real storyline is this synergy between the away from home and the at home channel, where consumers get to see and enjoy a broad range of their favorite hot and cold beverages, both in the home and wherever they are away from home. So that’s been key to our success up to this point.

Brian Kelley

I’ll just add one thing to what TJ said, and that is we do see the away from home channel and the subchannels within away from home as a big opportunity for us. Predominantly, our away from home business today is office, and we think there’s a number of other opportunities that we can go after, and we will.

Scott Van Winkle - Canaccord Genuity

So when we sit back and think about kind of mid single digit brewer shipment growth this year, what we’re saying is, in home, is that the rate of household penetration, incremental homes year over year, is going to grow at the same level. Are we at that point in away from home as well, where the pace of incremental office, car dealership penetration, etc. is kind of growing at the same rate, rather than accelerating or decelerating?

Brian Kelley

Scott, let me make sure, the assertion you made is not accurate. Even if brewer sales stay flat, we will dramatically grow the installed base. So again, if brewer sales were to stay even flat, we would dramatically grow the installed base. So with a slight increase in brewer sales, or mid single digits, we will grow the installed base dramatically. And Michelle, you want to comment a little further on where we think we are and how we view it going forward?

Michelle Stacy

When you look at flat brewer sales, but you look at what we last reported as an installed household brewers in use of about 12.5 million brewers, if we were just flat, we would be exponentially growing the installed base. And that’s where you get our estimate of 12.2 million to 12.5 million households with brewers in use growing to 16-17 million. That’s a lot more than a single digit growth. And so that’s really the incredible aspect of this business model, is that while we’re looking at single digit, we’re still really adding to the household base, which is going to drive even more significant volume in the portion pack area.

Scott Van Winkle - Canaccord Genuity

Maybe I kind of misspoke the question, but I certainly gather that shipping millions of incremental brewers is growing the household base. I was thinking of away from home. Are we kind of at the same rate of the ultimate market opportunity penetration? Is the away from home kind of mirroring the at home?

T.J. Whalen

Yeah, the same theory holds. There’s a little bit of nuance in terms of what type of placement and what type of brewer you’re talking about. Obviously if you’re growing in large offices, that has a different effect in terms of the result in portion pack demand stream versus small offices or hotels. As Brian mentioned, there’s also other aspects of the away from home channel, particularly food service, which could have the potential to change those dynamics in significant ways in the future.

Operator

We’ll now take a question from Jon Andersen with William Blair.

Jon Andersen - William Blair

I’ve got a question for Brian to start, on the sustainability of the partner relationships. It’s something you brought up during your comments. Just would be interested in your thoughts on the most important things that GMCR can do as a company to ensure that you maintain those relationships, both from a duration standpoint but also the economic. What are the things that you think are most important to focus on to ensure the sustainability of those relationships over time?

Brian Kelley

I think there are a few things. First, we have to be able to deliver a great cup of coffee every time, for every brand. And every time the consumer experiences one of the coffee brands, it needs to be the best they’ve ever tasted, the freshest cup. And that, fundamentally, is what the great partner brands we have in our system are all about. And so that’s first and foremost. The product has to be terrific.

The second thing is, continue to grow the installed base. We have a real advantage. We have a scaled installed base. It is one where very, very few other opportunities exist to be able to go get into 12 million plus households quickly with your brand, and with a great experience. And so it’s important that that scale, in that installed base, continues to be an advantage, because it’s what helps our partners get real value from the Keurig system.

And I think the third thing then is having mutually beneficial economics between us and our partners. And we’ve been able to do that. We have long term relationships that we feel good about. We have a very, what I’d call critical, advantage in terms of the DNA at GMCR that I mentioned earlier. The team here is very, very good at partnering with other coffee brands and building a system that makes sense.

And those are the three key things that I would see that are important to making sure that we have longevity in our partnerships.

Jon Andersen - William Blair

And one quick follow up for Fran, I guess. I think on the last call you mentioned that you expected to leverage G&A in 2013. That didn’t happen in the first quarter, clearly, and I think it sounds like there were some specific circumstances in Q1 why that was not the case. But do you still expect to leverage G&A for the full year at this point?

Fran Rathke

You know, I think in terms of this quarter, I would say we did see an increase in G&A because of primarily we had increased compensation overall. Some of that performance-based. So I think we expect for the year to overall show leverage in the G&A area. I think we’ve been adding across the board, especially we need to add to our R&D area right now. So I think you’ll start seeing - although that’s more in the selling and operating line - but I think we believe overall we would see some leverage for G&A for the year. And I think you were talking just G&A, not selling and operating. Selling and operating had the advertising.

Brian Kelley

Even if you back out the incremental advertising and promotional dollars we spent this year, we’re up 8% in G&A on a 16% revenue growth. So that is leverage. And I think we’ll continue to see that leverage. I want to make sure that we reiterate that.

Operator

We’ll now go to Mark Astrachan from Stifel Nicolaus.

Mark Astrachan - Stifel Nicolaus

Two housekeeping question, and then a real question. What were the Vue sales in the quarter? Also, where does the brewer rebate show up that you did in September and October, in the P&L? And what was it in the quarter? And then just more broadly, you shipped five million brewers in the period, and even if they’re not all sold, that’s still a huge increase in the installed base. Yet it sounds like you’re anticipating roughly the same K-cup sales growth in the second quarter and over the balance of the year. So I guess I’m struggling to understand how that’s possible, unless attachment rates are worsening and/or price mix also worsened.

Fran Rathke

I’m just getting those Vue sales for you.

Brian Kelley

While Fran is getting those sales, I’ll give you a couple of facts about Vue. One is that it was the number-one selling brewer over $200 in the industry. Second, of all brewers in the industry, it was number eight in terms of dollar sales. So when you look at the success of the Vue brewer, we’re pretty pleased. Now, it’s hard to compare it to the scale of Keurig, right? Because we’ve got a very, very large Keurig sales base and installed base. But when you look at that Vue machine, as it is today, and at its price point, we’re pleased with it.

Fran Rathke

Total Vue system sales for the quarter was around $19 million, and in terms of the rebates for the brewers, that is in net sales, as a reduction to net sales, and it was about $6-7 million this past quarter.

Michelle Stacy

Most of those rebate sales occurred during the month of October. And October is the smallest month of the quarter, so it was really immaterial in terms of driving the total overall volume that we were able to drive during the quarter. And we were glad that we did that in the month of October, because we were able to understand the responsiveness of the consumer to running that type of a rebate.

I think the other thing, just to build on the Vue, is that we are going to be shipping the Vue brewer at the $169 price point for this coming month, Dads and Grads time period, and so the next big phase of our Vue launch is coming up as we start to bring the Vue into more popular price points.

Mark Astrachan - Stifel Nicolaus

Maybe just a follow up to the last question. As you look out one or two years, how big do you see Vue as a percentage of the system?

Brian Kelley

I think rather than give you that comment - because we’re working through strategically just what we want to do - know that the Vue technology is the finest technology we have. And as we work out the strategy of how that’s going to play out, we’ll be smarter about it in the next three months or so, and we’ll give you updates as we get them, rather than give you an estimate today.

Mark Astrachan - Stifel Nicolaus

And then on the K-cup versus brewer installed base question, please?

Michelle Stacy

When we take a look at how we do the walk down from total brewer sales to the installed base, there are a number of different factors that go into that, including not just how many brewers we’ve sold, but how many of them go into households, how many of those go into what are not households - college dorms, offices, places of work. How many of those are increases to inventory? How many of those are brewers that are replacing retired brewers, or trade ups in the home. And that walk down that we do is what leads us from the total brewer sales to the installed base, which we’ve projected to be between 16 million and 17 million households by the time we come out of the fiscal year.

Operator

And we’ll now go to Greg McKinley from Dougherty & Company.

Greg McKinley - Dougherty & Company

I just wanted to make sure I better understand your perception of inventories in the distribution channel. I guess more as it relates to your Q2 view. I think you had talked about a belief that maybe the point of sale sales were exceeded by wholesale shipments on brewers, and as a result, we’re not expecting growth in wholesale shipments for Q2. How has your perception of the K-cup moved through the channel varied from delivery into the sale out?

And maybe if you could just give us a sense now, with your March quarter view out there, have you had any changes in terms of what your K-cup outlook was for the first half, initially, versus what you’re looking for it to be today?

John Whoriskey

First, just to reflect back on the quarter, if you look at the [NPD] data, you will see growth in share. We were one in three coffeemakers sold in the quarter according to NPD. We were 60% of the dollars in that quarter. And we grew our business, and our POS business was up roughly 14%. I think with the softer holiday season with some of our key retailers, we certainly would have expected it to be better than some of those results, and consequently, we’re carrying in some additional inventory into this quarter that is very manageable. But it’s reflected, and we’re going to still see continued POS growth through the second quarter, bringing our inventories back in line. And that’s why we’re seeing a reduction in our shipment plans for the quarter.

Greg McKinley - Dougherty & Company

And then can you address that from a portion pack perspective?

John Whoriskey

I think I would just simply say that coming out of the quarter, I think we’re in a very good inventory position with all of our key retail partners. Very much in line with the growth expectations, and what we’ve seen coming out of the quarter. So I think we’re really well-positioned and continuing to build inventories where we have expansion going on with displays and planogram sets, etc., around the country.

Greg McKinley - Dougherty & Company

Could you expand a little bit on channel shift? I know one big issue that has occurred over the last 18 months or so is that as your product moves mainstream, of course it’s being sold in mass merchants and grocers. To a degree, that’s shifted from specialty. Where do you think we are in the migration of that sales channel from specialty retailers or department stores into mass merchants and grocery, and how much cannibalization is still occurring from that channel to the others?

T.J. Whalen

We continue to see different rates of growth for our different partners, and I think as you rightly pointed out, it has to do with gaining some speed in terms of a mass appeal proposition. And not surprisingly, that’s leading the volume toward some of the mass availability channels. I think we’re effectively managing that with our partners in terms of making sure that they have the products that they need to be successful.

As Brian mentioned, we’ve struggled occasionally in making sure that we can do that as quickly and as fully as we or our partners would like, and we’re keenly focused on that. And then we’re also mindful of making sure that we continue to get as much value from the partnership with specialty retailers in terms of making sure that they have access to great new products and existing new opportunities to keep consumers coming into their locations as well.

Brian Kelley

We may also mention that the shift isn’t finished yet. And that was one of the questions you asked. And a large part of it has moved, but you’re going to continue to see it.

Operator

Our next question comes from Bryan Spillane from Bank of America Merrill Lynch.

Bryan Spillane - Bank of America Merrill Lynch

Brian, first I just want to thank you for giving us as much insight and details, or your insights into your early thinking. I know it’s only been 60 days. But you actually gave a lot of info. And especially effective with the bullet points. I think I lost count at about 20, but this is a crowd that really likes bullet points, so it was very effective.

So I guess two things that I picked up on. One is you mentioned the opportunity to improve return on invested capital in the future. And I guess your starting point is actually a pretty good one. The return on invested capital at Green Mountain is relatively high to begin with. So I guess if you think about the drivers of that, especially if we’re going to be spending more on brand spending, and more on R&D, is it leverage? Is it mix? Just conceptually, kind of where you think the sources are that would drive higher return on invested capital?

Brian Kelley

Well, let’s talk about first, the numerator. If you look at the return side, we think there’s gross margin upside and improvement in our business. None of us are satisfied with our gross margin this quarter.

When we look at it we know we can improve gross margin and that’s going to come from operational improvement. It’s going to come from mix. It’s going to be coming from making sure we do some of the – and they’re not simple but they’re basics like improving out of stocks in stores.

And so gross margin and improving that is going to be critical to us going forward. That will certainly improve our return. If you look at the leverage we can get on the operating margin line, we can be as effective as you saw here in this quarter. We’re going to continue to make sure that our operating expenses, non-marking, non-R&D expenses, gross lower than sales. So we think we’re going to continue to get leverage there.

And then when you look on the capital side, if you look at the denominator, the return on our – the capital we have, we can make the assets we have sweat harder. It’s that simple and we – it’s simple to talk about. It’s not so simple to do and that’s why we’re not promising return from it in 2013.

But as we look at the plants, this was a business that has had extraordinary growth over the last five years and they did a terrific job of getting the capacity in and now making that capacity work its most efficient and working hardest, that’s what we’re going to do.

And those are the basics that we’ll do to drive return on invested capital.

Bryan Spillane - Bank of America Merrill Lynch

And if I could just one follow-up – I think there were a few questions over the course of the Q&A about early read on how the view is done and I guess maybe just stepping back a little bit broader you’ve seen other competitors come into the market as well for their – as somebody comes into the single cup market, later adopters now coming into this market.

Is there a – have you any early read yet on whether the next generation of brewers are going to be a relatively niche and basically your basic model is still going to be the predominant platform for adoption going forward or is it really too early to get that read?

Brian Kelley

I’m going to take the easy way out on this one and say it’s a little too early to give you that read but I will say this. You can think of the technology and view as – you can apply that to the current install base of brewers, meaning not the install base but in the machine, the brewer itself.

We chose the launch view as the line extension. But line extensions can have their technology cascaded into the base brewers as well. And so with – that’s the strategy we have to work out.

The technology’s what’s critical. It’s what it delivers to the consumer that’s critical and how we architect that across our portfolio of brewers, that’s the work we have to do to make sure we get the most out of that technology and that’s the work we’ll do over the next few months.

Operator

Your next question comes from the line of Tony Brenner – Roth Capital Partners.

Tony Brenner – Roth Capital Partners

I’ve got a question about how exactly you’ve arrived at your full-year guidance, which basically just incorporates the extent that you beat the first quarter by just one or two pennies to that.

But in the first quarter, the beef was all on margins and given that your warranty expense is improving, that Green coffee prices continue to come down in the first quarter, that the mix between brewer sales and pickup sales, reports (inaudible) sales should continue to become more favorable, I understand why you wouldn’t want to push the envelope exactly in your guidance.

But it seems like you’re maybe being a little overly conservative. Is that an unreasonable way to look at it?

Brian Kelley

Well, here’s what I would say. In the past, as you probably know, we’ve seen significant variability month to month, quarter to quarter and we’re very comfortable with our annual guidance, which is – remind you, a non-GAAP EPS growth rate of 17% to 21% on an apples-to-apples basis when you compare 52 weeks to 52 weeks and that’s above our longer term earnings guidance for growth in the mid teens.

So the annual guidance we’re giving is above what our long-term growth is. And we want to continue to invest in our brands and our R&D capabilities and we want to provide quarterly guidance that’s realistic and achievable.

Tony Brenner – Roth Capital Partners

So and you’re suggesting the first quarter was more of an aberration in terms of its ability to be well ahead of where you implied it to be in the middle of the quarter.

Brian Kelley

No, I wouldn’t agree with that.

Tony Brenner – Roth Capital Partners

Is the tax rate for the year to be in line with what the first quarter was or that 38.4%?

Fran Rathke

Tony, it’s Fran. In terms of guidance for Q2, for example, we have net sales in the range of $14 million to $18 million. In Q1 we delivered 16% growth. We noted that we expect, once again, quarter over quarter, we expect a slight decline in brewer shipments but, as you know, that’s now where we make our money. It’s really on a single pack.

I think we feel we still see very strong growth in the single pack area. But I think we’ve also continued to factor in some of the dynamics out in the marketplace and we do expect in Q2, for example, and Q3, Q4, to continue to invest in R&D.

Brian mentioned we want to also support our brands, especially in Q3 with the moms, dads and grads season, so we’re going to continue to evaluate what’s the best marketing spend there.

So I think we factored into what we believe are realistic and achievable targets here. The minor thing – but they add up in terms of pennies per share – I know the tax rate, for example this quarter over last year added about or hit us by about $0.01 a share. That’s factored in also for the rest of the year.

Tony Brenner – Roth Capital Partners

The 38.4% is a going rate for the full year, Fran?

Fran Rathke

I think it’s approximately for the year at that rate.

Operator

Your next question comes from the line of Alton Stump – Longbow Research.

Alton Stump – Longbow Research

(inaudible) just on this whole install versus growth and brewer basis and what (inaudible) takeouts. If I actually take a longer-term view or you (haven’t initialized) but you still think we can get to about 35 million or so installed viewers by (’14) or (’16). It’s about double what the actual number is now.

So if we were to carry that out and if we do see any pickup (inaudible) rate actually stay flat as the (technical difficulty) 20% or so for your growth rate for the next four years. Am I in the right ballpark on that or am I missing something with my math?

Brian Kelley

Well, I would first say given the context of what we operate with today, which is a brewer that predominantly has coffee take ups and some tea take ups and if you look at that, I’m not of the belief that we’re limited to 35 million households. There’s 90 million households that have a coffee brewer in them and so it’s not clear to me that 35 million is a ceiling for us.

The second thing is that we have a lot of innovation in the pipeline and that innovation in the pipeline allows us to both grow vertically and horizontally. If you think about the ability to be attractive to homes beyond say what that 35 million might have done with the current base of machines, we think there is opportunity there.

And the (attach up) rate, as you can imagine, it’s complex as you look at new machines that go in and as we look at expanding, potentially expanding into other beverages and day parts and other channels, you can see that that could grow the business beyond perhaps what you’re suggesting.

That said, what you’ve suggested as a growth rate for today’s base is a fairly good one.

Alton Stump – Longbow Research

And I was actually implying that that would be a pretty healthy growth rate the next four years, so if you’re saying that it should be higher than that, that would be I think quite positive.

I have a second follow-up question or it’s the first and last follow-up question that I have. It’s just I’m a (inaudible), I think Larry mentioned on the fourth quarter call that it looks like what was being taken from shelf space for (federal level) was added to the category and was not taken directly from the (inaudible) brand. Is that still the case from what you’re seeing in the marketplace?

T.J. Whalen

Yes, broadly I would characterize any unauthorized or private label placement around the country as additive shelf space. As I think I mentioned before in terms of the growth of our items on shelf, we see that having grown significantly both year-over-year and sequentially, quarter-to-quarter.

And as you look around the country you’ll probably see a number of key customers in various processes of expanding their single cup shelf sets and placing new (packs) on shelf that we provide to them.

Brian Kelley

Certainly a priority for us is to make sure that our retail partners see the need to expand the shelf space dedicated to this format because this is where the growth is. And so that’s certainly a priority for us.

Operator

Your next question comes from the line of Mark Riddick – Williams Capital.

Mark Riddick – Williams Capital

I was wondering if you could touch a little bit more on the brand building opportunities, especially as it plays to your partners, your retail partners? I was wondering if – and it may be a little early for this – but I was wondering if you could share some thoughts on where we should look for additional support in the coming months where you could perhaps maybe work in tandem with retail partners.

Brian Kelley

And I think you can see today already examples in the market where some of our partners have practically worked with us to advertise their quality brands within our system and build both brands, securing system, and their brand and we’re going to encourage that more and more with all of our partners.

It’s certainly the best way to build the system and the value of the system and so you can see a number of examples out there today and that’s one area.

In terms of areas we’ll focus on, there’s – we’ve done very little advertising or marketing about the brands that you can enjoy in the Keurig system. We’ve spent a lot of time appropriately advertising and introducing the Keurig system to the US populous and I think that’s been the right thing and we still have a lot of work to do in that.

And you’ll see over time it’ll get clearer and clearer as to where we’ll put the money in terms of building the brands within the system and making sure we build the overall system as well.

Mark Riddick – Williams Capital

And going forward, do you foresee – and, again, it may be a little early for this but I’ll ask anyway – do you foresee any significant change as far as the mix and delivery of those brand messages? Should we expect to see more TV commercials or more of an outreach on the mobile side of things?

Brian Kelley

It’s a little too early for me on that. Michele, do you want to make a comment on that?

Michelle Stacy

I think that we’re going to be looking at a couple of different things as we go forward to build the current brand and the current brews brand. The first thing is we’re going to continue to apply our marketing spending more geographic.

We have very different levels of development of the Keurig brand as it goes from east coast to the west. So you’ll start to see us look at how we can develop our marketing plan more geographically and more city by city.

I think the second thing that we’re going to continue to do is there’s a real link between our away from home business and our at-home business and the opportunity for the consumer to actually experience and sample the Keurig system and so we’re going to continue to look at ways that we can give the consumer the experience, whether it’s through continuing to develop our away from home channel or to continue to do more demonstrations in-mall and in-store.

The third piece of mobile and online is very important. We know that 70% of consumers go to our website to look and explore before the buy a brewer and we believe there is continual ways we can optimize the virtual experience of our brand both on our own websites, on our partner websites as well as in the mobile and social arena.

And I think those are really the three big levers that we’re going to look at as we continue to grow.

I think the other part – and I’ll turn it over to John Whoriskey to talk a little bit about – is really maximizing the in-store experience for the consumer and making it very clear what brands are part of the Keurig brewed experience and are authorized brands in our systems and which are not. So John, maybe you want to talk a little to that.

John Whoriskey

Yes, sure. As you were speaking to working with our retail partners, whether it be in-store presence or their advertising support or even their online capabilities, now the key focus of making sure that it’s clear to a consumer what brands are part of the Keurig brewer system and which ones are not.

So working closely with our key partners is one of our key initiatives going forward as well.

Brian Kelley

I’ll mention one other thing and that is you’ve heard about this in prior calls but we continue to make progress and we’re optimistic about the progress we’re making with interactive technology.

And so we continue to work on that and we will continue to keep you updated as we progress.

Operator

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

Akshay Jagdale – KeyBanc Capital Markets

Brian, this one’s for you again. So you talked about myths regarding the system that you believe exists. One of them was related to patent expiration. The other one, obviously partner brands, somewhat call them related.

But certainly I would say given how the short interest in your stock is, there’s still opportunity to dispel those myths. Can you talk about what specifically you can provide to your partner brands and the brands in your system and to consumers that current competing manufacturers of (cake ups) or portion packs, unlicensed portion packs cannot?

Brian Kelley

Well, the first is a quality experience with the beverage and that is perhaps the single most important thing is that you can count on a Keurig brewed (cake up) every time to provide an excellent coffee experience.

And while I’ll let the marketplace play out in terms of where that is for our non-authorized packs, I will say that we are confident in our ability to provide a quality experience every time. And that’s certainly one thing we can provide.

The second thing is that when you have a system with the install base we have and we have the capability to make sure that we can grow with our customers, together with our partners, that we can market together with our partners, that we can build brands together with our partners, that’s something. It’s a benefit of being part of the Keurig system and I think our partners recognize it.

I think in many cases you’ll see they recognize that we are a critical part of their strategy and they’re a critical part of our strategy and I think that from that standpoint that’s a benefit we bring to the system.

But the most important thing is we bring a quality consumer experience every time and we’ll make sure that we continue to do that.

Akshay Jagdale – KeyBanc Capital Markets

And what will it take in your opinion longer term to dispel some of the myths/ you said the marketplace will play out. Some of the I would say negative theses around the stock is that this is a co-packing company and eventually returns on invested capital are going to mimic that of a co-packing company.

So you’ve talked a little bit about ROIC. You’ve talked about free cash flow. But what do you think it takes to dispel some of these myths and does ROIC in your opinion play a major role or is there one or two metrics that you’d like to be judged on over the long term?

Brian Kelley

Well, I’m not going to give you an answer as to what it takes to dispel myths. I can tell you what we’re going to continue to do, which is grow our earnings, continue to grow our revenue, grow our mix, improve our quality.

The one thing I would say is that most co-packers, as you called it, or co-manufacturers, have the number one brand in the system and, in fact, five of the top eight brands in the system. That’s not a co-packer. That’s a brand builder.

And this company’s a brand builder and will continue to be a brand builder. And so ultimately the value in consumer goods is in the brand. It’s in the promise that the brand offers and then delivers.

And so when you look at what separates a manufacturing company from a marketer and brand builder, it’s the brand. And if you look at the Keurig brand, if you look at the Green Mountain brand, if you look at brands we built in this system and this team has built in this system that three years ago the consumer in America had never heard of them and today these are very, very large beverage brands. That’s a brand builder.

That’s not a manufacturer. That’s a brand builder. And that’s the difference between a marketer and a co-packer and that’s what you’ll continue to see.

Operator

Your next question comes from the line of Matthew DiFrisco – Lazard.

Matthew DiFrisco – Lazard

But what is the change in CapEx that generated I guess the $30 million savings from previous guidance?

Fran Rathke

Essentially we’re reducing our range by about $30 million as we believe we can spend our capital more efficiently and just continue to refine our estimates for the year.

Matthew DiFrisco - Lazard

Well, I guess does it go back – is it coming from capacity? Are you – I’m wondering where you found that $30 million savings from the original plan.

Fran Rathke

I think primarily it’s across the board just continuing to scrub. We put our budgets and plans together frankly last summer and we are constantly updating and revising our numbers. It’s really not due to cutting back on capacity at all.

Brian Kelley

I’ll just add to that. And I’ll say that we’d rather get efficiency from the current lines we have and the current capability we have and we know we can. And rather than put more capital in the ground, we’ll get more efficiency and that’s why we’ve reduced it by $30 million.

Operator

And that’s all the time we have for questions today. I’ll now turn the conference over to our presenters for any additional or closing remarks.

Brian Kelley

Well, first, we’d like to thank all of you for joining us today and for your continued support of our company and for the questions and for the challenges. I look forward to meeting many of you in person over the coming weeks and months and working with you to grow this great company. Thank you.

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