Peet's Coffee & Tea Inc. Q1 2009 Earnings Call Transcript

| About: Peet's Coffee (PEET)

Peet’s Coffee & Tea Inc. (NASDAQ:PEET)

Q1 2009 Earnings Call

April 28, 2009; 5:00 pm ET

Executives

Pat O’Dea - President & Chief Executive Officer

Tom Cawley - Chief Financial Officer

Analysts

Jake Bartlett - Oppenheimer

Rob Napoli - Piper Jaffray

Michael Podhorzer - Sidoti & Company

Colin Guheen - Cowen

Steve West - Stifel Nicolaus

Jonathan Komp - Robert W. Baird

Operator

Good day everyone and welcome to the Peet’s Coffee & Tea, first quarter 2009 earnings results conference call. As a reminder, today’s call is being recorded and we will be conducting a question-and-answer session after the presentation. With us today from the company is the President and Chief Executive Officer, Mr. Pat O’Dea and the Chief Financial Officer, Mr. Tom Cawley.

For opening remarks, I would now like to turn the conference over to Mr. Tom Cawley. Please, go ahead sir.

Tom Cawley

Thank you operator. As we begin, I need to inform you that the information being discussed in this conference call will include forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those projected in these forward-looking statements and Peet’s can give no assurance to the effect of these statements and we assume no obligation to update them.

For additional information concerning factors that could cause actual results to differ materially from those in our forward-looking statements, please refer to the section entitled “Risk Factors” in the most recent annual report or Form 10-K for the year ended December 28, 2008 filed with the SEC on March 13 of this year. It’s also available on Peet’s website.

Now, let’s turn it over to Pat.

Pat O’Dea

Thanks Tom. I would like to share a couple of points that I think characterize our results this quarter and are likely to be a recurring theme for this year.

First, we’ve made a very conscious strategic decision to maintain our premium position and not overreact to the near-term environment, by price discounting in a way that would damage the brand longer term. As a result, we are delivering profitable growth, but foregoing some near-term less profitable sales. The fact that this strategy is working so well for us in this environment is a testament to the strength of the Peet’s brand.

Second, we are leveraging the investments we’ve made to deliver real operating efficiencies and cost improvements. As Tom will share later, we achieved significant sustainable improvement in just about every detailed line item of our P&L. These improvements are directly tied to the past investments we made in our people, plans and system and we expect them to continue throughout the year.

As a result, our first quarter operating profit and margin were up plus 61% and 230 basis points respectively versus year ago, on sales growth of 7%. This translated to EPS of $0.23, up 53% versus year ago.

I’ll briefly highlight our sales performance by channel. Our retail business grew 8% in the quarter. This was driven by new stores opened in the last year and very modest growth in existing stores. We benefited from stronger than normal bean business in our stores this quarter, driven by several successful special offering coffees, including Sumatra Blue Batak and Anniversary Blend.

We opened two new stores versus nine a year ago and this quarter we did a major remodel of Alfred Peet’s first store opened in 1966 in Berkeley. Over the 10 weeks of construction, we restored the original design and added a special exhibit space to commemorate Alfred Peet’s legacy and this store’s distinction of the birth place of the specialty coffee movement in America.

Our grocery business was up 11% this quarter, not bad in this environment, but lower than we planned for ourselves. Some grocery customers chose to react to the near term economic environment with deep discount price promoting, on both mainstream and specialty brand during the quarter and we chose not to participate in this activity for the reasons I cited earlier.

Our fundamental business remains strong. For the latest 12 week IRI report ending March 22, our dollar sales through grocery grew 16% and our share grew 10% in markets where Peet’s is available. The specialty category in these markets grew a little over 8%, down a little from the past 52 week growth rate of 11%.

We added about 200 new points of distribution in the quarter, for a total of about 8400 stores now. The food service and office segment grew 10% driven primarily by additional license location versus a year ago and the home delivery business, which is most impacted by our grocery expansion, declined 8% versus last year.

Now I’ll turn it over to Tom to talk through the financials for the quarter.

Tom Cawley

Thanks Pat. For the first quarter, total operating profit improved 61% over last year, while EPS was up 53%. Let me explain how we achieved these results. Gross margin was 54.8%, up 240 basis points from last years 52.4%. As Pat mentioned earlier, this increase was caused by a favorability in every line item, with the exception of coffee. Since gross margin represents the largest improvement year-over-year, I will focus most of my attention here.

First, let me talk about the things we don’t directly control, specifically what we need to pay for coffee, milk and gasoline. Net-net, these costs ended up having a zero net impact on our P&L, since higher coffee costs were offset by lower milk and lower gasoline. Our coffee costs for the quarter were up about 7% above last year, which resulted in a cost that was 90 basis points above last year.

We only buy the highest quality coffees, so this is not an area where we look to save costs. However, this was offset by lower milk prices, which were about l6% below last year, which improved margins by 40 basis points and lower fuel costs, which reduce shipping costs by about another 40 basis points. Given how commodities have hurt us in the past, being flat was actually a good thing for us.

Now let me move to what we do control and how that helps to drive the 240 basis point improvement in gross margin. First, our roasting plant cost was lower than last year by 80 basis points, as we continue to gain efficiencies and leverage that investment. Second, we continue to see the benefit of good operations in our stores. Having fewer new stores and the introduction of our back-of-house inventory management system has allowed us to a better focus and less start-up inefficiencies. These factors contributed another 40 basis points when applied across the whole company.

Third, last year we selectively took pricing in our grocery and retail businesses and this combined to improve our margins by 60 basis points. Lastly, we have some favorable mix shifts in our business towards higher gross margins products. Two examples I can point to are; first, selling more beans in our retail stores, particularly special offerings and in our food services business we’ve been growing the higher margin license side of the business, much faster than we probably grew business.

All-in-all, on the gross margin front, there was no one silver bullet that drove the improvement. Our people have rallied at all levels of the organization to remove unnecessary costs and it paid huge dividends in the quarter. The rest of the P&L was rather uneventful, so I won’t repeat what is in the press release.

Operating expenses depreciation in G&A were essentially flat to last year, which allowed the gross margin upside to flow to the bottom line. I do want to point out the results in our segment reporting however, because our results really reflect our strategy. First, retail operating margins improved from 6.4% to 10.3%. For the past year or so we have said that we will increase retail margins as a result of two dynamics.

First, we now have a great team in place that has the tools to improve performance and we are seeing that in every area from coffee waste to supplies cost. Second, we have said for years that investing in new stores was dragging down margins and if we slowdown the number of store openings, you would see margins improve and they are.

In specialty, we have communicated that margin will go down due to our expansion of grocery in the Eastern U.S. where our operating expenses are higher than in the West. That has played out also, as specialty margins dropped from 26.9% to 25.9%, still a very attractive margin.

Now, I’d like to move below the operating profit line where things are a little different than last year. Interest income was $78,000 for the quarter, down from $304,000 last year, due to a much lower interest rate and about half the cash on hand to the prior year. Our tax rate was 37.7 for the quarter and it should be that for the full year. This is slightly above last year’s full year rate of 37%, due to the lower tax interest income.

From a cash standpoint, we had a very strong quarter. We generated $12 million in cash from operations and we only spent $4 million on capital spending. So, our net cash flow from operations was $8 million. With our stock trading down during the quarter, we took about $7 million of that cash and repurchased 323,000 shares at an average price of $20.33. As a result, we ended the quarter with $17 million in cash and we continue to have no debt. For the full year we’ll spend around $15 million in CapEx and we expect our cash flow to continue to be strong.

Overall, our profit performance in the quarter was strong and the operating efficiencies and costs improvement that drove it were broad-based and largely sustainable. That said, we expect our spending to increase sequentially in the second quarter of this year in support of some initiatives, while last year this spending was more concentrated in the first quarter. As a result, we remain on track for the $0.94 to $1 EPS target, but there will be some balancing out that will occur from the first to the second quarter.

Now, I’d like to turn it back over to Pat to wrap it up.

Pat O'Dea

Thanks Tom. I expect much of this year to follow the theme outlined at the start of the call, improving profitability as we leverage past investments and profitable, but more modest sales growth as we maintain the integrity of our brand premium position in this economic environment. I’m confident this is the right approach and will deliver strong earnings growth for Peet’s shareholders this year and in years to come.

That’s all of our prepared comments today. Operator, we can now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matthew Difrisco with Oppenheimer.

Jake Bartlett - Oppenheimer

Hello, this is Jake Bartlett in for Matt. My question had to do with grocery stores. I’m wondering whether your targets in 2009 for new distribution points is similar to what to talked about most recently? I think that was about 1000 stores?

Pat O'Dea

Yes, it’s still about a 1000 stores. We added about 200 in a quarter and we still feel like a 1000 for the year is about, right.

Jake Bartlett - Oppenheimer

Okay and for the last 800, is that within the next three quarters? I think originally we were expecting it to be more in the back half of the year?

Pat O'Dea

Yes, I think the bulk of the remainder will be in the back half.

Jake Bartlett - Oppenheimer

Okay and could you remind me for a pricing at the grocery channel. When you start to lap the price increases that you took most recently?

Pat O'Dea

Well, let me talk about that for a minute. In August of last year, it was about 6% price increase in selective geographies and given the environment today, we’ve actually given back most of that price increase in the form of lowering our everyday price, given the environment with the customers that we have taken that price increase in last year. So, I wouldn’t think to the August ’08 price increase of having any impact between now and when we lap of.

Jake Bartlett - Oppenheimer

Okay, so did the improvement in the COGS and occupancy that line items, I thought that was to do with pricing a bit?

Pat O'Dea

Yes, Jake what I said in the speech was 60 basis points of our COGS improvement was due to the pricing we took in those businesses, most of that was retail. There is only about 20 basis points. So, we have a slightly higher in that pricing grocery, but it isn’t a huge impact right now.

Jake Bartlett - Oppenheimer

Okay, but you improved the relative COGS in the specialty sales of about a 170 basis points, I think year-over-year?

Pat O'Dea

Yes and so as you at the other items that would have impacted that, the lower plant costs that goes across all channels, so that would have been helping there and so the operational things that would go from the plant and then they got a little bit of the pricing impact and then a lot of the favorable mix stuff came from our specialty channels also.

So, for example in food service where we sell supplies also to our customers, we didn’t sell some of our sales drops; they weren’t buying as many supplies from us. We make virtually zero margins on them, so, that’s not a big loss for us. So we were selling more coffee rather than supplies. So, that was another mix impact. So, the lot of that came from specialty.

Jake Bartlett - Oppenheimer

Just in terms of having a lapped some more difficult I guess costs comparisons from stuff you are doing in 1Q last year, what were the differences, I guess going from 1Q to 2Q last year. Just how can we think about, how margin going to be a little more pressured in the second quarter versus this quarter? What are the main line items that you see?

Pat O'Dea

Well, I’ll talk about more activities, because you’re right in pointing out. I mean last year in Q1, we had a 4.4 operating margin; in Q2, we had a 6.4. So the comparison doesn’t get more difficult when we get into Q2. Last year we had a very active first quarter particularly in the grocery business, where we went into about 1000 grocery stores and Publix in Florida and the whole costs associated with getting there, which was a lot of operating expenses, as well as some cost of goods.

Last year, in the first quarter we open nine stores, this year we’ve only opened two, so there was a lot less activity, whereas last quarter just had a pretty full docket of things that were happening, that were putting pressure on the costs that we didn’t have in Q1 of this year.

As we look to Q2, for us this year we will have some higher marketing and G&A for some initiatives that we have going on that we’re not going to talk about in any detail, but there’ll be slightly higher costs in there and so sequentially our operating margin will probably go down in Q2 from Q1, versus last year having to go up by 200 basis points.

Jake Bartlett – Oppenheimer

Great, thank you very much.

Operator

Our next question will come from Nicole Miller Regan with Piper Jaffray

Rob Napoli - Piper Jaffray

This is actually Rob in for Nichole today. A couple of questions for you; first of all I know you guys are concentrated on the retail side, primarily in the California Market. Have you seen any changes I guess with unemployment rates or anything you could speak of? Have you obviously probably had less turnover within your labor force, but also on your customers coming in; has average check hung in there and what is your average check right now?

Tom Cawley

So first off, Pat said in his part of the speech that stores were modestly positive, so that trend is pretty consistent with where we were all last year; so from total retail sales we have not seen a drop-off. Now being modestly positive, we did have a slight price increase, so our traffic was slightly negative.

As far as average transaction, our average transaction is kind of meaningless because it averages a counter transaction that’s very high with a beverage and pastry transaction which is lower. So we’re running kind of the 350 range for people who are buying just beverages and for people on the other side of the aisle, they are running between $13 and $14.

Rob Napoli - Piper Jaffray

Okay and then I know in your prepared comments you mentioned essentially that you raised prices last year and you haven’t seen much of a trade-off. I guess, you haven’t seen any competition from the people going strictly for value, trading down, anything of that nature, because essentially I’m wondering if you guys should be looking at bundling the product or anything like that. Have you seen any deterioration I guess from not pursuing more value conscious customer or is that not your customer.

Tom Cawley

Yes, it’s not our customer. I mean just one fact before Pat kind of takes over; we took it as nickel price increase in our drinks in September. On year-over-year basis our average transaction is up a nickel. So, we did get the trade down or any of those things that we would have expected.

Pat O’Dea

Yes, I just think the other perspectives on that is we have a little over 193 stores I think open now and most of them are in carefully select geographies; we’re certainly not over stored by any means.

The fact that you see the sort of stability in performance in our retail stores kind of sequentially over the last several quarter, despite what you pointed out which is pretty darn high on unemployment range throughout the State of California and in some cases they are near leading the nation type double-digit rates, reflects the strength of the brand and the loyalty of the customer base.

That’s what we really focused on in an environment like this, that’s continuing to fully satisfy our core of highly loyal, dedicated customers and I think you’re seeing it hold up in the business results in our stores and for that matter where we sell coffee and grocery stores as well.

Rob Napoli - Piper Jaffray

Okay and then on the development front, I know that you guys have said about 10 retail this year, first of all is that still what we’re looking for and then have you had any thoughts into next year as far as that goes.

Tom Cawley

We are still probably around 8 to 10 this year and we are not ready to give any guidance for next year.

Rob Napoli - Piper Jaffray

Okay and then finally on green coffee prices, you guys were locked in about I believe the last time we heard 85% contracted. Are you still floating on that remaining 15% for FY ’09?

Tom Cawley

We are 100% locked for ’09 and in fact, we have been buying for’10 and we’re at 35% of ’10 already purchased also. As we said before, we locked in between 2% and 3% for the full years as far as our inflation for 2009.

Rob Napoli - Piper Jaffray

Okay and then what about for FY ’10 versus FY ’09 on the 35% you’ve locked in?

Pat O'Dea

Yes, it’s not really accurate for us to be able to give you a number, because we don’t lock in 35% of all coffees. So, if we’ve locked in cheaper coffees, it might be the type of coffee we have, because we do have a pretty wide range of the coffee. So, I don’t have a number; it’s only 35% purchase that would be reasonable to give you a perspective for next year.

If coffee stays where it is, we have said that will lower, because we did lock in while the prices were falling pretty dramatically, we kind of caught it on its way down and it when down further. So, I think the markets still on a favorable situation, but until we locked more in 35% and we really can’t give very good guidance on it.

Rob Napoli - Piper Jaffray

Sure and then one last question here, on the repurchase I know you guys went over it and went over it kind of quick or I just didn’t catch it. I know there was a million shares outstanding at the last time in February, how many shares are remaining I guess after the share repurchases of $7 million that you did in this last quarter?

Pat O'Dea

So, we bought 323,000 shares. I don’t know the exact number, I know it’s somewhere between $0.5 million and the $1 million, because we’re kind of working off of two repurchases. We a million authorization like a year and half ago that we didn’t finish and when we’re halfway through that we got another million authorization, but I’m not exactly sure how many outstanding; that I have to go back and do the math.

Rob Napoli - Piper Jaffray

Okay, thank you very much.

Operator

Next we’ll hear from Michael Podhorzer with Sidoti & Company.

Michael Podhorzer - Sidoti & Company

Hey guys. I was just wondering if you are seeing increased sales, allocations near a closed Starbucks.

Pat O'Dea

No, not necessarily. They don’t have a lot in our areas and one of the things that we’ve pretty consistently said in the past is when they open, they weren’t impacting us and our expectations are, when they close they won’t impact us either. Because generally if they are closing one, there is two Starbucks between us and the closed store, because they are so much denser than we are.

Michael Podhorzer - Sidoti & Company

Right, so are you guys doing any additional real estate opportunities in those closed Starbucks or again you’re not really seeing much of an impact there?

Pat O'Dea

Yes, not really.

Michael Podhorzer - Sidoti & Company

Alright, that’s all I have. Thanks.

Operator

Next we’ll hear from Colin Guheen with Cowen.

Colin Guheen - Cowen

Hi there. Just I guess a little more color on the competitive environment out there in the grocery stores. Pat, do you think its inventory deloading and people running through inventories with the discounting? Can you just maybe give a little more color about what’s going on out there and the duration of price points that you think are going to be holding there.

Pat O'Dea

Yes, so I think what’s happening Colin is, I think it’s mostly grocer driven. In this kind of an economic environment, there are alternative formats; the consumers can look to the shop and find better value sometimes, whether they be club stores or mass merchandiser or folks like that. I think some of the more mainstream grocers are sort of fighting an exodus of their traffic to those alternative formats.

So, in the short term when that occurs, the easiest lever for them to pull is to run deep discount promotions on items and categories that will bring customer traffic back into their stores, which is a little bit dangerous of course, right in over the long haul, because if you sort of bring people into your grocery store, selling a product at half the price and then they come back in and it’s double the price everyday; you kind of train them to only buy it on promotions. So, that can only work for very short period of time.

So, I think that’s what we’re seeing; there’s some of those dynamic going on as grocers try to bring traffic back into their stores. I think, what you’ll see occur now is the settling in that says, look we’re in this kind of an environment for an extended period of time and I think the grocers across the board will take a serious look at what their everyday prices are in key categories that the consumer shops.

Coffee’s certainly one of them, and begin to take down their everyday prices a little bit through a combination of us taking our everyday pricing action and them taking a little margin reduction to get there everyday prices right and get back on a regular system of good everyday pricing, relative to alternative formats and promotion.

So, I think that’s the shake out that sort of occurs over the last three to six months and moving forward, you are likely to see lower everyday prices to the consumer and mainstream grocery stores and things like coffee and other items, and more reasonable price promoting off of that point.

During that period of time, when that deep discount thing is occurring, we just chose not to play and I think the fact of the matter is that we have a very loyal customer base and we are held up quite well and drove some good profitable volume growth and our share continued to grow. So, that’s kind of my outlook of what it looks like, looking back and then looking forward.

Colin Guheen - Cowen

I know historically you haven’t been able to get into or haven’t pursued the mass or any of these alternative channels, has anything changed with that or anyway that the DSP system could work in those and any mass alternative channel outside grocery stores?

Tom Cawley

Yes well, I mean we could go into Club stores and/or mass merchandisers, both of them are available and we could go to both. The category size in the mass merchandisers for the kind of brand and the kind of business that we do is pretty small. So we’ve chosen not to go there to-date.

Club stores is a little bit different story, because obviously they take significantly lower margins and work on larger pack sizes, that’s not something that we’ve decided to do, because it tends to be sort of an in/out promoted business and it’s there one day, gone to next. So we are going to focus on building our everyday, day in and day out business in grocery.

Colin Guheen - Cowen

Okay, great and I guess just a question, any update on the kind of top-line outlook, here it seems like it might be a little bit below the previous guidance of around 10%?

Tom Cawley

Yes, it does feel that way now and I think the reason why we didn’t say a number per se is I think as we kind of look forward into the second quarter, it feels like it could be in the same geography that we are in now, which is lower than what the sort of 10% guidance would have been.

As you are look in to the second half of the year, if anything I would think that it would get stronger, but just based on things we’re doing and then also what could happen externally. So, that’s kind of what it feels like right now.

The main point is, I think we’re actually performing quite well in the environment, growing very profitable sales and operating the company at a very high level of execution excellence and it’s enabling us to just strength the P&L sustainable now and well into the future.

So, I feel pretty good about it and if the winds change a little bit externally in the second half of the year and/or some of the initiatives that we are working on come together nicely, I’d feel a little bit more bullish in the second half, but the second quarter feels like the first quarter.

Pat O'Dea

Just to add to that Colin. Our outlook in the forecast we are giving for the full year is assuming that things really are going to get much better. So, it’s not like we are counting on a recovery to happen in the third and fourth quarter from the economic standpoint. We are assuming if things continue to be rough for the full year and that’s what we are prepared for on the cost side of the business. So, to the extent the things get better, we will be in better shape.

Colin Guheen - Cowen

Congratulations, it looks like all of your hard work for the last couple of years is really paying off. So, good luck and talk soon.

Pat O'Dea

Thanks.

Operator

And next we will hear from Steve West with Stifel Nicolaus.

Steve West - Stifel Nicolaus

Hi, I just have a couple of quick questions. Pat going back to kind of some of the promotions you see in the grocery store, there’s a lot of discounting going on by craft; you said it was the groceries driving that, but are you seeing it decelerate, because it seems like it has started to decelerate over the last couple of months. Are you still you seeing that in March and then now into April?

Pat O'Dea

I think we started to see it occur kind of mid fourth quarter and then it’s kind of been spotty since then, but we’ve seen some pretty recent stuff actually, as recent as March, but our indications are from the work that we’re doing with our customers, is that this will evolves as I articulated before, where people will settle in, to getting their everyday prices right and getting back to a more normal lower everyday price and more reasonable promotion level.

Because you get the short term spikes, but you really train a customer only to buy on promotion and you also train them to be a little upset with you when they come in and see the everyday price so much more than the promoted price, and I think the groceries are seeing that and recognizing as the actions that we see them taking are consistent with that evolution occurring now.

So I think, the answer is moving forward, I think you’ll see it, but I think they’re occurring pretty evenly throughout the first quarter.

Steve West - Stifel Nicolaus

Okay thanks. Then can you talk to about how many licensees you guys have know in the system?

Tom Cawley

We just added two in this quarter. I think we ended with 68, so I think we’re at 70 now?

Pat O’Dea

Yes, 70, 72.

Steve West - Stifel Nicolaus

How many are you thinking you’ll get by the end of the year?

Pat O’Dea

Our target was 30 and I think we still have that target, because we were at 30 to 40 and were probably closer to 30 now. It depends on what are peoples capital budgets, since it’s other peoples money building them, but we still think we’ll be in that range.

Steve West - Stifel Nicolaus

Okay and then I guess kind of going back to the previous question about your outlook and the expectations here with the reiterating guidance, are you guys looking to maybe do some more maybe investments in the back half of the year? You’re getting some pretty strong margin improvements from the mature stores coming into the systems. Are we looking at in more investments going forward? Is that how to think about it?

Pat O’Dea

When you say investments?

Steve West - Stifel Nicolaus

In the back end of the business or it is being more conservative; is that the better way to look at it, as far as your guidance now?

Pat O’Dea

As I talked about earlier, there is more activity that we’re going to have, particularly in about the next six months than we had in the first quarter. So, part of that is there; that there is things we’ll be doing. We are not necessarily laying out, but there is some expenses we just know will happen.

Steve West - Stifel Nicolaus

Okay. Fair enough. Thank you.

Operator

And our next question comes from Jonathan Komp with Robert W. Baird.

Jonathan Komp - Robert W. Baird

Yes hi. Good afternoon. This is Jonathan Komp in for David Tarantino. If I could ask a quick clarification on the comments you gave on the retail same-store sales. I think you said that trends in Q1 were stable versus the level that you’ve seen all over last year pretty much. Could you comment more specifically on Q1 versus kind of the Q4 level that you saw?

Pat O’Dea

Yes, it’s pretty much the same. I think we said probably in the fourth quarter call, if we were to line out all four quarters last year, they were within point of each other from the high to the low as far as our performance and we were within that same range. So it was pretty much identical.

Jonathan Komp - Robert W. Baird

Okay that’s helpful, and if you could comment, I know you gave a few comments on some positive mix helping margins within the retail segment related to higher sales force from some whole bean coffee and things like that. Do you expect that to continue throughout the year?

Tom Cawley

To an extent, maybe not to the same degree. One of the things that did help us in our retail stores, is we have one of the most successful products that we had a special offering, coffees and our Sumatra Blue Batak; it did very, very well. It was a very distinctive coffee and drove a lot of coffee sales in our stores and it’s a higher priced product, so that does help margin.

So that was probably more. I don’t think we have anything quite as distinctive as that, at least in the very near future. Obviously, all our coffees are very distinctive. This one had a pretty high mix. As far as within the other channels, I think it will continue. The mix of the businesses has been specialty.

We have been growing as we’ve doubled our license business last year. Our license has higher margins than our other foodservice business, where we just supply the coffee and don’t collect our royalty and that will continue. So I’d say, the total mix there, half of it definitely will continue or maybe half of it won’t.

Jonathan Komp - Robert W. Baird

Okay that’s helpful, and then a little more specifically on the cost of sales line, can you talk a little bit about what type of year-over-year improvement you’re assuming in that line for the rest of the year?

Tom Cawley

I’ll just talk kind of the whole year, rather than kind of a balanced year. I think cost of sales, instead of being up in kind of the 200 basis points that we were for the full-year, we’ll be closer to the 100’s type of basis point improvement overall. So it’s not going to be as strong as the first quarter.

I mean if you look at last year for example, our cost of goods went from 47.6 in the first quarter to 46 in the second quarter. So, it was a pretty big drop-off, so it’s a more difficult comparison.

Jonathan Komp - Robert W. Baird

Okay great thanks.

Operator

(Operator Instructions) Gentlemen, we have no further questions in the queue at this time.

Tom Cawley

Okay. Well, thank you all for attending our call and we will talk to you at the end of the second quarter.

Pat O’Dea

Thank you

Operator

That does conclude today’s conference. We do appreciate your participation.

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