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

F3Q 2013 Earnings Conference Call

August 7, 2013 17:00 ET

Executives

Suzanne DuLong - Vice President, Investor Relations and Corporate Communications

Brian Kelley - President and Chief Executive Officer

Fran Rathke - Chief Financial Officer

T.J. Whalen - Chief Strategy and Sustainability Officer

John Whoriskey - President, U.S. Sales

Analysts

Akshay Jagdale - KeyBanc Capital Markets

Matthew DiFrisco - Lazard Capital Markets

Bill Chappell - SunTrust

Bryan Spillane - Bank of America

Alton Stump - Longbow Research

Scott Van Winkle - Canaccord Genuity

Greg McKinley - Dougherty

Jon Andersen - William Blair

Mark Astrachan - Stifel Nicolaus

Mitch Pinheiro - Imperial Capital

Anton Brenner - Roth Capital Partners

Marc Riddick - Williams Capital

Greg McKinley - Dougherty

Operator

Good afternoon, and welcome to the Green Mountain Coffee Roasters Incorporated Fiscal 2013 Third Quarter Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to the company’s Vice President of Investor Relations and Corporate Communications, Suzanne DuLong. Suzanne, please go ahead.

Suzanne DuLong

Thank you, Rebecca, 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 will discuss on this call on our website as well. Our Form 10-Q for the period is also available.

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. We’ll then open the call to questions from the sell-side analysts.

With us for the Q&A session are T.J. Whalen, Chief Strategy and Sustainability Officer and John Whoriskey, President of U.S. Sales. To ensure we have the opportunity to address everyone’s questions during the time we have allotted for this call, we ask that you limit yourself to one question. We will revisit the queue for follow-up questions.

Finally, I will 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 the 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 word “certain information.”

And now, I will turn the call over to Brian Kelley.

Brian Kelley

Thanks, Suzanne and good afternoon everyone. We delivered solid results in our third quarter with a strong earnings performance and very healthy free cash flow growth. Our 11% revenue growth was at the low end of our range. Importantly, our U.S. business which accounts for 85% of our total revenue grew at a healthy 14%. Revenue from our Canadian business unit declined by 3% due primarily to some customer inventory timing issues. Our non-GAAP EPS grew 58% this is five times the rate of our revenue growth and year-to-date we delivered 582 million of free cash flow which is three times the cash flow we delivered the same period a year ago. These results are indicative of the strength of our business model and illustrate strong fundamentals at the foundation of our business. They also reflect very good execution from an operating standpoint. The Keurig beverage system is winning in the marketplace every day because it's positively transforming the way consumers craft beverages at home. As we look strategically at our business there are three critical drivers, our install base at brewers, our attachment rate which is the number of beverages consumed per day per brewer and the growth of our portion packs at home.

All three of these key metrics are very healthy. Our install base of U.S. at home brewers is growing and we continue to expect it to be approximately 16 million by the end of our fiscal year. Our at home attachment rate is steady meaning our install base of U.S. at home brewers continues to drive consistent consumption of portion packs. We base this on the fact that the brewer install base growth rate and portion pack growth rate are nearly identical to-date at 36% and 37%. In our U.S. at home portion pack shipments grew a very healthy 28%, this excludes unlike it's portion packs.

As Fran takes us through the quarters financial I will come back and go into more depth on these three key fundamentals and their drivers. I’ll also detail our operational progress and finally I’ll discuss the growth potential we see in front of us. We’re growing increasingly competent that the consumer benefits delivered by our Keurig beverage system will preserve our leadership position in the marketplace and give us significant opportunity to continue to grow our coffee business and do for other beverage categories what we have done for coffee.

We expect that as we execute against this growth strategy we will be in a very good position to continue to grow revenue, grow earnings per share, drive free cash flow and generate strong shareholder returns. Before I turn it over to Fran for closer look at the financials let me thank all of our employees whose hard work delivered these results. Fran?

Fran Rathke

Thank you Brian and hello everyone. We reported total revenue of just over 967 million for the quarter with 11% sales growth. In the quarter single serve pack volumes increased 21% driving 18% revenue growth. Portion pack volume growth in the quarter was adversely affected primarily by shipments to a partner although this partner’s point of sale growth continues to be strong in the 25% to 30% range. I caution not to read too much into this as shipments to partners have and will likely continue to fluctuate quarter-to-quarter as they manage inventories that they sell to customers.

Keurig brewer unit shipment volumes increased 1% year-over-year while brewer and accessory revenues decreased 4% impacted by product mix. Net sales in our other category which includes traditional package coffee formats declined 11% driven by the continued conversion to single serve. This transition is occurring in an even more pronounced way in Canada. Overall the trend towards single serve format is in-line with our expectations. Looking regionally our U.S. business was strong with growth of 14% in the quarter offset by a 3% decline in our Canadian business. The softness in Canada was driven primarily by brewer sales volume decline resulting from three things, one, a Father Day’s promotion by our largest competitor during which more than an estimated 100,000 single serve brewers were given away. We see this as unsustainable. Two, a few retailers slowed the pace of purchases to reduce brewer inventory during the quarter and finally our largest competitor in Canada had a brewer recall in last year’s third fiscal quarter which drove higher Keurig brewer sales in the prior period.

Importantly according to our estimates our Canadian brewer point of sale grew 3.4% in the quarter. We expect our Canadian business to improve and deliver flat to low single digits revenue growth in the fourth quarter. Moving to review of growth profits, we saw a 720 basis point improvement, a 42.1% in net sales versus 34.9% in the prior year period. 370 basis points of the improvement was due to lower green coffee cost. We will continue to benefit from lower coffee cost into next year. At this point, we are roughly 86% locked for our green coffee purchases for fiscal year 2014. With this forward cost clarity, we have strong confidence in one of our most significant input cost for fiscal 2014. 310 basis points of the overall gross profit improvement, was related to quality and productivity related improvements. Today’s press release includes the table that outlines all of the year-to-year changes in gross margins.

Turning to operating expenses, SG&A was up 23% in the third quarter. Half of the increase is due to G&A, which includes investments and logistics, infrastructure and operations, which we expect to yield productivity results in fiscal 2014 and 2015. Importantly, our R&D investment was up 41% as we continue to prepare to launch new products from our innovation pipeline. And our marketing spend is up 25% as we invest in building our brands. We are pleased to be able to invest in these areas and still grow our non-GAAP earnings 58% in the period. And while a 3 percentage point favorable tax rate variance helped our earnings per share growth, you can see the real quality of earnings on our operating income lines, which as a percentage of sales increased by over 500 basis points. Along with the gross profit improvement, this was the key driver of our earnings growth.

Regarding cash, our momentum continued and we are very pleased with our $126 million free cash flow in the quarter. Also you may notice, our accounts receivables increased 25% in the quarter. This is primarily due to timing and is not indicative of any underlying trends. Day’s sales outstanding for the period increased slightly from 28 to 31 days. On the share repurchase plan, while we weren’t active this quarter, we still have $298 million on the authorization and we will active opportunistically going forward.

Before I recap our guidance for the fourth fiscal quarter and the 2013 fiscal year, I’d like to remind you that last year’s fourth quarter included an additional week. The extra week added approximately $90 million to net sales, approximate $11 million to net income after tax and approximately $0.07 to diluted earnings per share in the fourth quarter and fiscal year 2012. Our guidance for the first quarter – for the fourth quarter and fiscal year 2013 excludes the impact of the extra week of fiscal year 2012.

Turning to our outlook for the fourth quarter of 2013, we anticipate a total net sales increase in the range of 11% to 15% from the year ago period driven by continued single serve pack growth. We expect non-GAAP earnings per diluted share in the range of $0.69 to $0.74 excluding the non-GAAP items as noted in today’s press release. This represents a growth rate of 21% to 30% over last year on a comparable 13-week basis. Our fourth quarter guidance implies that for the full fiscal year, we expect total net sales growth in the range of 13% to 14% over fiscal 2012.

For the remainder of the year, we expect continued favorable green coffee cost, lower warranty expense, and lower labor and overhead manufacturing costs to contribute to better gross margins compared to 2013. We have increased our non-GAAP EPS estimates to a range of $3.19 to $3.24 per share representing growth of 37% to 39% over the prior year’s $2.33 per share. For the year, we are reaffirming guidance that we expect our brewer unit shipment and POS growth, be in the mid-single-digits. We are maintaining our estimated capital investment in the range of $275 million to $325 million, down from $400 million last year. We are pleased to be projecting 35% plus earnings growth on significantly less capital investments. At the midpoint, our CapEx estimates represents approximately 7% of 2013 forecasted sales down from 10% in 2012 and 11% in 2011. Finally for the year we’re increasing our free cash flow estimates to a range of 350 million to 425 million. We have refined our long term revenue guidance and are maintaining our long term annual earnings per growth in the mid-teens. Brian will discuss this and more detail in his remarks and now I’ll turn the call back to Brian.

Brian Kelley

Thanks Fran. Let me address four key subjects that we believe are important to our business. I’ll first address our install base of brewers, our attachment rate and the growth of our portion packs at home. Then I’ll discuss our view of unlicensed packs and our future plans in this area, third I will provide a brief operational update and finally I’ll wrap up with a discussion of our business model, our growth potential and why we believe this will translate into sustainable earnings per share growth well into the future.

Let’s first discuss our install base. We estimate we will have 16 million brewers in our at home U.S. install base by the end of the fiscal year. This install base we believe will be 36% higher than a year ago, for comparative purposes now I will talk to the attachment rate in shipments for the U.S. at home segment which relates to that install base. As you know broadly if portion pack growth overtime is higher than install base growth then the attachment rate will be growing and conversely if portion pack growth overtime is lower than the install base growth then you can assume the attachment rate is falling.

Compared to the 36% brewer install based growth we estimate at home portion packs point of sale growth including license and unlicensed packs to be 37% year-to-date therefore this indicates the overall attachment rate of our Keurig brewer systems steady.

Now let’s address the impact of unlicensed products on a Keurig brewer system, compared to the total U.S. at home portion pack point of sale growth rate of 37% that we just discussed our Keurig brewer packs meaning owned and licensed packs have grown 28% year-to-date on that same POS basis. The 9 points of delta between the two numbers 37% and 28% shows unlicensed pack coming into our system and contributing 9 points of growth, therefore these unlicensed packs represent about 8% share of the at home channels year-to-date and 7% share of all channels year-to-date.

At the end of the third quarter we estimate the at home unlicensed share to be roughly 11% and the all channel share to be 10% for the quarter on that same basis. By the way if you use our shipment data instead of point of sale data the results show nearly the same steady attachment rate and the same unlicensed share as our U.S. at home portion pack shipments are up 27% year-to-date. Now as many of you know unlicensed share differs widely by channel. It's important to note that the IRI, multi-outlet report monitors our grocery and mass customers as well as (inaudible). Those channels constitute roughly 55% of our total U.S. portion pack shipment volume year-to-date.

It is primarily in these channels that unlicensed portion packs have gained the 8 points of share year-to-date to which we referred earlier. By the way this data is included on one of our supplemental slides. There are far fewer unlicensed packs in the away from home channels, the specialty and department store channels and Costco in our direct to consumer channel.

These channels collectively account for 45% of our U.S. volume year-to-date. Overall we expect the unlicensed share of portion packs to grow in the short term but begin to decline as we convert unlicensed packs in the licensed partners. We’re currently in active discussions with a number of unlicensed brands to bring them into our system on a licensed basis. We will believe, we will be successful with a number of them over the next several months. We also are currently in discussions with selected large customers who are private label or store brands that we would also welcome into our system. There are two key benefits to being a licensed partner in our Keurig beverage system. The first is better and more consistent quality. As an indication of this quality the most recent brand study of consumer trial and repeat rates by IRI show the Top 10 brands for repeat in the Keurig beverage system are all GMCR owned, licensed or partner brands. In fact the highest repeat rate in the Keurig system continues to belong to the Green Mountain Coffee brand at over 60%. Because we designed the entire system, the appliance, the portion pack, the roasting grinding process in the manufacturing lines that make the portion packs, the quality, taste, and safety of every cup brewed is assured for our own in-license packs. Partners like Starbucks and Smuckers, Unilever, ConAgra, Tata, and Dunkin all recognize the quality benefits of being a licensed partner in our system. The second major benefit is that partners participate in our powerful innovation stream going forward. Each of the partners above have and will continue to benefit as we bring differentiated features and functionality to our portfolio that will provide consumers.

Now, let me address some of the areas of operational improvement that were beginning to produce results. With the organization changes we discussed last quarter, we have now integrated the product supply system for both our beverages and our brewers. Today, I am pleased to announce two new additions to our team. Bob Ostryniec will join our company in late August as our Chief Product Supply Officer reporting to me. Bob brings a deep global supply chain manufacturing and customer service set of experiences from his days at Heinz, GE in the Appliance division, and at Stanley Tools. His experience in consumer packaged goods and appliances, makes him a perfect addition to our team. He will be responsible for global product supply, including manufacturing, logistics and procurement as well as the efficiency, quality, and safety and environmental management of the company’s infrastructure and operations for brewers and for portion packs.

In addition, I am pleased to announce that John Naughton will join in late September as Senior Vice President of Quality, Safety, and Environmental with Bob’s product supply organization. John has extensive experience in engineering with both consumer products and high-tech most recently serving as Vice President in Quality for Nokia. In his role that John will provide strategic and operational leadership for all quality taking environmental aspects of our global product supply system. These two new leaders along with their very talented teams will continue the ongoing optimization of our procurement, manufacturing, logistics, and quality performance. We expect these and other actions to generate efficiencies that we will use to optimize returns and to reinvest in growth.

Now, let me address a few of the most prominent growth opportunities in front of us. I noted last quarter that beyond the opportunity we see with our current products in our current channels, we are building a strong pipeline of innovative products that we expect to deliver across multiple channels and geographies. We’ll obviously have more to talk about these as we get closer to launching the new platforms, but let me touch on some directional highlights.

First, we will continue to drive new functionality and innovation into our current hot beverage platform. In fact, we continue to progress well on our new line of care brewers that will deliver the best of both cake up and view technology and we will be capable of brewing both cake up packs and view packs. We are confident this new line will deliver differentiated features and functionality that will delight consumers. In addition, we continue to make progress with our interactive functionality. We are moving forward to commercialize an interactive solution that assures a great consumer experience and that can deliver unique consumer benefits. We expect portion packs with this technology to begin shipping to customers later this year.

Second, we will continue to add new brands and new beverages to our system. The Keurig brand has come to stand for excellence in every aspect of the coffee experience assuring quality, taste, and choice for every consumer. And we are pushing that excellence beyond coffee and other beverages. Third, we will focus on continued quality improvement and lower cost. More than 40% of our gross margin improvement in the quarter 10 basis points came from quality and productivity improvements. Our innovations will be focused not just on delighting consumers with great quality, but also on delivering ongoing improvements in important elements like fit and finish, ergonomics, noise both in decimal level and noise quality and design appeal.

Fourth, as we discussed we expect to drive incremental growth in our away from home channels over the next several years by targeting specific opportunities in the four main sub-segments of the away from home channel, foodservice, workplace, education, and hospitality. The majority of our away from home business remains focused on and driven by Keurig single serve system offerings. Through extensive research, however, we have also seen demand for higher volume brewing, and we are pleased to announce our new Keurig bolt brewing system to meet that customer need. In offices, nearly 65% of coffee brewed is still brewed by the pot. We will convert some of that 65% to single serve putting large to medium offices where volume brewing is needed, we’re targeting our new BOLT solution. Our research indicates that the combination of Keurig BOLT and a Keurig single cup brewer has very high appeal for offices, so much so that we believe Keurig BOLT system could actually drive increased Keurig single cup penetration as well. In addition, BOLT has appeal for convenient stores, for food service outlets and in the hospitality channel. BOLT is already an office test and we expect to launch this new product in the fall. We believe the benefits Keurig brings to brewing, speed, convenience, quality and choice are attractive benefits to all sub-segments in a way from home and we will continue to update all of you on our new wins as we move forward and finally we will launch new Keurig beverage platforms to address new beverage categories and appeal to new beverage occasions and day parts.

Today we’re able to meet the needs of coffee, tea and coco drinkers. Looking ahead we see strong opportunity, pursue adjacencies to our current business. In the cold category for instance we see opportunity in juices, carbonated beverages, sports drinks and enhanced waters. We have entered categories where we are able to bring the benefit and attributes consumers have come to love about the Keurig system, quality, choice, convenience and freshness. And we’re appropriate, we will do so with partners and establish beverage brand to who are eager to assess and access the millions of Keurig households where our products are delighting consumers every day.

Consequently we expect these new product introductions both in coffee and other beverages to materially broaden the scope of our business and expand our addressable marketplace opportunity over time. And we will showcase many of these innovations at GMCR’s First Investor Day to be held on Tuesday, September 10th in Boston where we will talk in more detail about our vision and how it drives our strategy and our growth expectations. We will be sending out invitations shortly with all the details.

So we have covered a lot of ground today but before Q&A let me touch on just a few more points. First, our long-term guidance. There are number of dynamic variables in our business, including the timing of our new products and the speed of adding new brands and of converting on license packs which will impact sales contributions in any given period. Given these dynamics in our business, we felt more comfortable widening our long-term revenue expectations and speaking to the revenue opportunity on a more general basis rather than on a narrow percentage range. We’ve renewed and as we look at those expectations we remain very comfortable with long-term earnings-per-share growth in the mid-teens and since earnings are the real drivers of value let me take you through the numerous levers we have to drive consistent profitability.

First, we have enormous controllable cost leverage. For instance on SG&A we have been in the very fortunate position to be able to build a strong infrastructure, have great talent and capability while still delivering significant EPS growth. Our SG&A at 20% of revenue can significantly improve as a percent of sales over time. Also, we have a number of productivity opportunities beyond SG&A in our manufacturing plants, procurement, logistics and product quality that can be mined for the next several years. Let me put this in perspective. While we’re certainly pleased that we’re 86% locked for our 2014 coffee costs and more favorable rate, should coffee start to move upward in 2015 or beyond we’re confident that our SG&A and product supply productivity opportunities can more than offset a significant rise in coffee cost. To quantify this, a 10% increase in coffee cost from expected 2014 levels could be offset by a 100 basis point improvement in SG&A in other words SG&A will be 19% of sales instead of 20% still a very, very healthy level.

Therefore with a very large and growing install base and an expanding opportunity beyond coffee and beyond North America that will lead to double-digit revenue growth. We believe we’re capable of long-term gross margin of 40% with 20% operating income margin generating very attractive earnings growth over time. I'll conclude by saying that I have now been at GMCR for just about eight months and in contact with our team here we have spent considerable time understanding our business, evaluating our strategy, assessing our innovation pipeline and formulating our growth and our operating plans. And when we look closely at the evolution of our company over the last 12 to 18 months I believe the progress we've made is substantial. We strengthened and diversified our leadership team and our board and restructured the organization to enable it to scale across multiple channels, beverage categories and global geographies. We’ve renewed and expanded our agreement with Starbucks and forged a very strong relationship between our two companies that will provide multiple opportunities for growth well into the future. We have renewed our agreement with Dunkin Brands and look forward to growing our mutual business with this popular brand. We have recently struck new agreements with Lipton with coffee bean and tea leaves mixing upon.

We are strengthening already great relationships with powerful brand partners like Smuckers, Lavazza, Unilever, Caribou, appliance partners like Jordan and Cuisinart, and with our retail customers, because we know that our partners are core to our success. And as a result, our portfolio of brands is diversifying and expanding to bring more consumers into our Keurig beverage system. We committed to grow our away from home channel and we are at the very beginning of that growth trajectory for this exciting channel given we are in less than 1% of foodservice outlets.

We are improving the already good quality of our brewers. We have begun to see productivity results in plants, in procurement and logistics. We focused and clarified our innovation pipeline and laid out a three-year plan that will launch what we believe will be a number of major innovations beginning in late calendar 2014. We shifted our strategy to welcome certain unlicensed and private label brands into the Keurig system. And finally, as an organization, we have recommitted to our mission of a Keurig brewer on every counter in a beverage (inaudible). We have accomplished much in the last year. And I am confident that we will be able to accomplish even more in the months ahead. We will be able to show you this progress and more at our Investor Day where we look forward to hosting many of you. Thank you.

Operator, we will now take questions from the sell-side analysts.

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions) Your first question will come from Akshay Jagdale with KeyBanc Capital Markets.

Akshay Jagdale - KeyBanc Capital Markets

Good evening.

Brian Kelley

Hi, Akshay.

Fran Rathke

Hi, Akshay.

Akshay Jagdale - KeyBanc Capital Markets

Lot to chew on, as always, thank you for all the additional disclosures you spoke. Just one clarification and one question. So, long-term sales guidance is double-digits could be the same as what you had before, have you seen anything in the last three months that makes you believe that the growth rate of this business inherently is lower or to the contrary? That’s the first question. And the second one is on your strategy on the non-licensed brands and you said you are pursuing or you are in conversations with many of them, I just want to understand you are doing that to maintain quality? That’s my impression. And it’s not a reflection of the competition being more successful than you expected or you are being worried about sort of the economics of the ecosystem being hurt by it. So, if you could clarify that that will be great? Thanks.

Brian Kelley

Sure, Akshay. First of all, there is we don’t see anything over the long-term that makes us less bullish on our growth projections. What we reflected is that we widened the band and widened the look, because we know that it will not always be consistent given launches of innovation, given the timing of certain conversions, we know it’s never perfect and it’s never exactly projectable, but there, no, we have not reduced in any way our long-term view of the growth potential for the company. On the unlicensed pack, I will say this, we had to say no, in many cases early on to unlicensed operators who wanted to come in to our system as we grew a company that grows 20 times in the last six years. We didn’t have the capacity. We couldn’t always meet the needs of some of the partners that went to unlicensed packs. We now have an infrastructure and have a capability to begin to meet more of those needs. And we are selectively approaching some of the unlicensed packs and we are in the middle of discussions with them today. But you are right we are doing it, because we know we can deliver great results to our consumers. The consumers love the brands that are in the Keurig system and we want to get the best brands in the Keurig system that consumers love.

Akshay Jagdale - KeyBanc Capital Markets

Great. I will get back in queue.

Brian Kelley

Thanks.

Operator

From Lazard we will go to Matthew DiFrisco.

Matthew DiFrisco - Lazard Capital Markets

Thank you. I have a question, just one thing before that, just clarity on the guidance. Fran, you gave the guidance and in the context of the fourth quarter it does reflect a little bit of an acceleration from the 11% just reported now. If I read that right you broke out the brewer and equipment being low single digits slightly up, is that the only variance so therefore sort of the pace of cup growth of 18% overall dollars presuming that’s going to be continuing it's now a little faster. Just wanted clarity on that and then I had a follow-up question.

Fran Rathke

You’re correct. In terms of the portion pack we anticipate where we had 21% volume growth, 18% dollar growth in Q3, we expect that to be move up into Q4. We noted that we had an ordering pattern with one of our partners where that will separate (ph) into Q4 and also we’re excited about the holiday season.

Matthew DiFrisco - Lazard Capital Markets

That's great and then Brian I guess when you talk about, just a follow-up to Akshay’s (ph) question there where you were talking about acquiring or gaining some of that unlicensed business, would that also potentially include buying what might be considered capacity now their capacity such as some plants I don’t I mean just like Maxwell House Plan Florida or something of that nature, would you be precluded, would you be interested in buying some of the capacities that’s out there that’s trying to mimic getting on to your machines?

Brian Kelley

Yeah we would, every situation is a little different and so we certainly don't want to comment on any individual situation but we’re willing to work with the partners to bring them into the system and there will be a lot of things that we would do appropriately and that are financially feasible for them and for us to do it and so that’s all to say just know that there is many, many different ways and many different approaches to bringing them into our system.

Matthew DiFrisco - Lazard Capital Markets

Understood. If I could be so (inaudible) just another follow-up question on the guidance Fran. The coffee cost you have locked in for ’14 at a favorable rate yet long-term guidance is for mid- teen EPS. If I sort of put those two things together we’re doing better than mid-teens would be early indication for ’14 considering favorable coffee tailwinds as long-term guidance doesn't include I guess wouldn’t include a continual favorable commodity cost environment. So would that be incorrect to assume that early outlook would be still for superior than that long-term growth rate as we look into ’14 ?

Fran Rathke

As we look into ’14, one, we haven't given guidance as we said last year we would provide that in our fourth quarter. So I think in terms of overall we see a lot of innovation and new platform launches that we need to invest in our business over the long term and that’s the mid-teens I think in terms of levers in the business clearly we’re heading into 2014 with a very positive coffee outlook and confident in that given we have so much of the year locked. So we will update you in terms of where we see growth for next year but I think that is one obviously a tailwind for us.

Operator

And next we will go to Bill Chappell with SunTrust.

Bill Chappell - SunTrust

One thing just a clarification, just making sure I’m thinking about this right, you said the at home growth was around 28% which is in-line with what IRI and Nielsen reported. Does that imply that the non-track channel is now kind of growing in-line with the track channel? I mean are you seeing pretty similar growth trends?

Brian Kelley

You know outside of IRI, you’re talking about retail or you’re talking about other channels?

Bill Chappell – SunTrust

Just for at home so it would be online or retail combined?

Brian Kelley

Yes the non- track retail business is growing at about the same rate, it's the best data we would have. If you look at the channel shift is going on, that might be the one, you’re going to see a channel shift from specialty where pickup started and where Keurig started. You know they continue to lose share to grocery, grocery would be higher, a higher growth rate than average specialty would be lower than that, but I think the non-measured channels would have similar growth rate. John do you think anything differently than that?

John Whoriskey

Yes I would say if you collectively put it all together on average, yes.

Bill Chappell – SunTrust

For a while there was migration to grocery but that seems like that’s it's kind of leveled off.

Brian Kelley

It's still going and it's still moving but I think we’re almost to the end of that and it's balancing.

Bill Chappell – SunTrust

Okay. And then just as you are looking at these non-licensed players, is there anything in your existing contracts, I think from like the example, Starbucks is supposed to be the only super premium in the mix, I don’t know if there is anything with Smuckers, but you have occluded from partnering with any of the current non-licensed players or can you talk to, I mean, all of them?

Brian Kelley

We can’t talk and we don’t do it to any partner agreement. What I will say is we are – we have broad availability to bring brands in, if they are very, very, there would be very little limitation to us.

Bill Chappell - SunTrust

Okay, great. I will get back in queue.

Fran Rathke

Thanks Bill

Operator

From Bank of America, we will go to Bryan Spillane.

Bryan Spillane - Bank of America

Hi, good afternoon.

Brian Kelley

Hi Bryan.

Bryan Spillane - Bank of America

You made some comments about interactive brewers coming later this year and I know there has been quite a bit of discussion in the market about that’s all based in the investment community about that, can you talk a little bit more about how that stages in terms of are we talking about interactive brewers technology across? Well, I mean and also you can talk a little bit more about how that would potentially affect some of the unauthorized cake ups?

Brian Kelley

First, thanks Bryan for the question. I think that the first thing is you said that we mentioned that we would have (Technical Difficulty) brewers will come later than that. So, let me explain the process and how the flow of this will work. The first thing obviously we have to do is we have to convert all of the portion packs in the market with the interactive technology. It’s really only then that you can put interactive brewers, you can put the ability to read inside a brewer. Otherwise, you would be putting brewers out in the market before all of the packs are converted. And so you will see fairly quickly and by the end of this calendar year, you will see these interactive packs come into the market. Now, we will necessarily be announcing when we put interactive brewers in the market, because we are – they will come into the market as we pack as we put them in, as we begin to understand what we want to do with this interactive technology, it’s wonderful in terms of being able to deliver consumer benefits to being able to improve how the consumer uses our packs and how the consumer uses the machine. So, we really wouldn’t anticipate if all converting until sometime in late 2014 calendar wise. And then it begins the process of converting. So, we are – when I say converting it won’t all be converted by 2014 the brewers, we do expect the portion packs too, but then the brewers will come online as we determine the timing. Just in terms of what we do, we haven’t – what we do is we are going to please consumers even more with these packs and we want the authorized packs to have terrific, terrific performance. And that’s what we’ll say.

Bryan Spillane - Bank of America

Is it still fair to say that, that for a consumer but for the timing of when a consumer would be able to experience, have an enhanced experience with an interactive brewer cup experience that’s something that’s going to happen later in calendar ‘14 as opposed to something sooner than that?

Brian Kelley

Yes, it will like on a broad scale, on a large scale, yes, there would be smaller scales that we would do it as we launch products throughout the time – throughout between now and 2014 to test and to make sure it delivers the benefits we want. But I would say in scale, yes, it will be end of ‘14 before consumers see that.

Bryan Spillane - Bank of America

And then sorry just one last point on that is just I would – it seems to me that even if it’s on a limited scale that the train at least would be able to see what your vision is in terms of interactive meaning even if it’s on a limited scale be able to actually see what interactives can actually deliver, is that fair to say before 2014?

Brian Kelley

Yes, it is fair to say. And you can imagine that we are out having discussions with our large customers today and that will continue over the next few months as we show them what our plan is and lay it for them with our partners.

Bryan Spillane - Bank of America

Thank you very much.

Brian Kelley

Thank you

Operator

From Longbow Research first we will go to Alton Stump.

Alton Stump - Longbow Research

Thank you. If you just talk a little bit obviously it was a very I think perhaps it's internal cost savings to production efficiency benefit that you mentioned here in fiscal 3Q, Brian. I’m curious as kind of look out for next couple of quarters when you might be able to give a more specifics if it's a cost savings range or if it's a margin savings range as you think you know you got a guide to build in appropriate for…

Brian Kelley

We’re likely not to give you that because you know much of the savings we want to reinvest in the business and reinvest in growth. We’re of building into our plans and productivity, we’re building into our how we share 2014 guidance. So I think I’ve seen and I know you've probably seen that it's very, very hard to give a number on that. We have internal plans and I have plenty of confidence that we will deliver on the productivity plans we have and that will be part of what we share with you for 2014 and beyond, but it is all of those things you mentioned, it's manufacturing, it's logistics, it's procurement. We get improvement in productivity from quality and all of those we’re the team is really making progress and again, we see that progress able to continue for the next couple of years.

Alton Stump - Longbow Research

Just a quick follow-up on the pricing front with the list pricing only down 2% in the quarter year-over-year, that would imply that you’re not seeing a material price compression obviously mix has some negative impact. But do you think you’ve haven color n as what you’re seeing in the marketplace and the list pricing perspective for take-ups?

Brian Kelley

Yeah actually we’re encouraged. As you mentioned a very small 2% decrease that is been seen in the marketplace, you know the unlicensed packs have tend to come in at the low end of the market and so if you look at the total market the mix is taken a 8% share year-to-date that mix it shifts a little bit there. Now we’re responsibly responding and we’re going to do a number of things to make sure we continue to win and gain share. But we’re moving responsibly in the market, we have a number of things we can do with our retail partners to continue to build business and our brands and again with an 8% year-to-date share the unlicensed tax is no question, they have made progress.

I would only say that early progress is one thing, but a brand has to get in the market, it has to get trial, it has to get repeat, it has to build loyalty among consumers that needs to have to perform really well and you hear me say on the call that the Top 10 brands in our system for repeat rate are brands that are licensed and owned and partners of ours because we’re really good at this and I’m not in any way discouraging competitors who are making unlicensed packs but we think we’re good, we think we’re very good and I think the consumer is voting that way.

So the brands come in early, they got to win long term and we think we offer a tremendous benefit to brands that come into our system.

Operator

And next we will go to Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

I’m going to ask a question (inaudible) I think you probably want to wait for next month to talk about it in Boston but is there anything else you can say on the beverage platforms I mean are we thinking about a single machine that does everything on your counter-top in a couple of years, is carbonated beverages something that the carbon patent application or trademark applications is that’s something that’s separate. Is there anything else you can give us, to kind of give us a hint of what’s coming next month?

Brian Kelley

I think next month you will be more informed in terms of our platform strategy where we are heading and I think you will get to a very, very good understanding of where we are going. Long term we have done a lot of looks in our studies at to what the consumer wants and what machines they want on their counter, what they want those machines to do, what levels of specialization those machines have to have, what level of combination can take place for the consumer and as we lay out our strategy for the platforms you will see that but it's going to be best to wait a little bit before we share that with you, but thanks Scott.

Scott Van Winkle - Canaccord Genuity

Can I ask you a question and then I think you will probably answer which is on the food serve side is there any big strides you have made since three months ago when you talked about in the last call, the food serve’s effort I saw something on the blog about a tested at some (inaudible) store in Maine and Seattle, is there anything you can talk about in that regard?

Brian Kelley

Well, so we have made tremendous progress, some of which we can’t talk about, because with agreements with customers and as we test things and as we go in there, we don’t talk about customers, we don’t talk about what our partnerships are and where we are heading. So, we have made great progress, but the most important progress is we have got a team that’s aligned, that has a clear strategy, that has a plan to go execute. We have got great talent in the business. We are going to – we are at the very, very beginning of this, but we are encouraged by what we are seeing early and we think that we will continue to get even more encouraged as we go forward.

Scott Van Winkle - Canaccord Genuity

Great, thank you very much.

Brian Kelley

Sure, Scott.

Fran Rathke

Thanks Scott.

Operator

Next we will go to Greg McKinley with Dougherty.

Greg McKinley - Dougherty

Yes, thank you. Could you talk about recording partners currently unlicensed partners to come into the system maybe a little more actively? How significant of the role could those end up playing within the system as a whole? I wonder if you can talk about that in sort of that framework of you are also expending more investments to develop your own brands. So, as we bring in more partners, how do you balance? They are supporting them with the investments you are making your own brand development and how large of a part of your system could these partner brands become?

Brian Kelley

It’s a really good question and it’s all – its part of the strategy in managing an open architecture. So, let me give you our philosophy, because I think it’s really important. First and foremost, the job at the Keurig beverage system is to perfect every brand that’s in it. And all of our partners, all of our license brands have invested a lot in their business, a lot in their brands, and they expect that the Keurig beverage system delivers a perfect cup every time. So, our job is to support every single brand in the system and the Keurig beverage system’s job is to make every brand that’s in the system win, not to artificially benefit one over another. If the Keurig beverage system is there to have an open architecture and let the consumer choose. So, that’s the first point.

We will always have brands in the categories we claim, because we know that we can create big great brands like the Green Mountain brand in coffee, we can create great brands and we can build those brands in our system. And as you have seen, we can build the brands as others can in some ways a lot quicker and a lot more effectively in the Keurig beverage system, and then historically the way it would have taken and the cost it would have taken and the time it would have taken to build it at retail through other routes to market. And so as we look long-term, there is number of ways to build brands, but the Keurig beverage system at home is certainly proving to be a powerful one as we have created a couple of billion dollar brands. And we think there is more to come. So, the answer is people who have a good brand we want them in the system, because consumers love their brands. And we want those brands in the system and we make them taste great and that’s what ultimately the power to Keurig beverage systems.

Greg McKinley - Dougherty

Thank you. And then I am wondering could you comment at all on with the new interactive technology getting commercialized, does that at all change the cost of either producing the brewer or the portion packs in a meaningful way?

Brian Kelley

It doesn’t change the portion pack in any meaningful way at all, the brewers does. It’s a minor cost increase, because you might imagine a mini or tiny miniature nano-camera that goes in that brewer, but it’s not a high cost.

Greg McKinley - Dougherty

Thank you

Operator

From William Blair, we will hear from Jon Andersen.

Jon Andersen - William Blair

Good afternoon everybody.

Brian Kelley

Good afternoon.

Fran Rathke

Thank you.

Jon Andersen - William Blair

I just wanted to ask you haven’t really talked too much about geographic expansion, and I know it’s something I have heard you discuss fairly recently. Any update in terms of how you are thinking about that, the strides you are making there? And then I think last quarter there was big news around the updated Starbucks agreement, the opportunity – pursuing the opportunity outside the U.S. is part of that. So, just looking for any thoughts you have there that you can share?

Brian Kelley

Yes, thanks Jon. I am actually going to expand the question a little bit because geographic expansion to us means two things. And I think the way meant it is global expansion, I will talk about that. But I am also going to talk about geographic expansion in the U.S., because it’s a really important and a very high opportunity for us. So, globally, we have identified I think what we said on the last call we have identified five or six countries, where we think we can pursue what we call a no invention strategy, where we go with the machine, the technology that we have with very little invention required. We know the consumers there like coffee the way American consumers love coffee so we can expect that the Keurig beverage system will be as popular there as it is here and we’ve identified those countries and we’re in the process, and over the 12 months, you'll see us enter some of these and it's going to be very, very early and we won't see results early like any global launch and global introduction. But it's important that we get out there, that we get the experience that we see it and then we know we’ve a lot of partners, we have a lot of customers who see the opportunity and come to us and talk about the opportunity to take our Keurig beverage system global and so we will.

As we get more information specifically on these countries and we have something to talk about we will let you know. We will give some more indications of this in September at the investor day. Then let me talk a little bit about geographic expansion I the U.S. because one of the exciting things we’re seeing is that we have enormous opportunity here in the U.S. to grow our business. So let me just give you a little perspective on that. Right now we’re in 13% of U.S. households but 13% isn't equal across all cities in the country. If you would break the U.S. in DMAs (ph) and you look at 35 large market areas, you look at 50 or 75 obviously we’re a company that started, Keurig started in Boston Green Mountain started in Vermont, we’re pretty strong in New England and in Boston and New Hampshire and Vermont, Massachusetts.

You might imagine the penetration and household penetration is lower on the West Coast and these are big coffee markets. Historically we didn't have the investment out in the West Coast in terms of sales teams, in terms of knowledge of the office coffee service markets. We started in New England, we’re very strong in New England. So imagine if that 13% is average that is a curve where at the tails on both ends you have got a couple of markets that are quite high and some markets in large markets that are quite low. Let me give you a sense, in the West on average our penetration might be in the 7% to 8% range whereas in the Northeast it's in the 18% to 19% range. And in the Midwest and in the South it's in between those and so we are about to embark in fact we already have on a geographic strategy within the U.S. as well where we can launch powerful programs that win with beverages, our beverages in Keurig on the street, in the town where we can go create buzz and exciting about our brands in these local markets and so we’re very, very excited about that.

Operator

Next we will hear from Mark Astrachan with Stifel.

Mark Astrachan - Stifel Nicolaus

Can you quantify the earnings benefit from reserving 400,000 for sales returns and reversing the warranty provisions again you seem a bit outside the normal experience for the company. And then just on the interactive technology system will it or will it not preclude unlicensed products and what prevents those unlicensed brands from adding a barcode or what not, just a bit curious why you take on the risk of making changes to the current platform when you talk of the idea that more licensed brands will enter the system in the coming months.

Fran Rathke

I’ll answer the first question, as we have noted, we’ve seen a tremendous improvement in the quality of our brewers this past year, and the way we collect that in our financials is through both the sales return reserve and the warranty reserve and we go backwards in time and look at actual historical data over a year, year and half out and we have seen a dramatic drop off in calls coming from customers asking for new brewer, or having any issues with their brewer as well as we have seen a significant drop off in sales returns from our customers. So our methodology in terms of how we set the reserve is very consistent and the last few quarters you have seen through the financials that the better qualities resulting in lower provision for sales returns as well as a lower warranty expense. So specifically this quarter the sales returns as we noted in our growth margin table and the press release helped our margins quarter-over-quarter, year-over-year improve our margin by about a 100 basis point so that does reflect on that much better quality as well as we worked with some of our customers in the last year to improve our practices and policies and they have been terrific working with us on. And once again that just showed up right in our numbers.

Mark Astrachan - Stifel Nicolaus

But I guess, just to quantify that, on the go forward basis at some point you run out of provisions the charge against, so at some point you get to a level like next year or quarter after, where there is a zero there?

Fran Rathke

Well, just to put in perspective, so at the end of June or end of our third quarter, our reserve for sales returns is about $26 million. And our warranty reserves is about $11 million. So, it sounds like we are going to “run out”, but I think what we are doing is lowering how much we have to keep funding, because the usage is so much lower.

Mark Astrachan - Stifel Nicolaus

Okay. And then on that second question, please?

Brian Kelley

Yes, your question really regarding unlicensed packs in relation to our interactive technology. The interactive technology is there and we will be able to do unique things to unique packs, because we will be able to read what pack goes in there. We have not made any decisions nor have we made any announcements about what it is that this can do or will do. It’s proprietary. We, at this stage, are not going to say what it does or what it will do or can do. We know it can improve the benefit for the consumer when we can read a pack of our authorized products and deliver a great cup of coffee or great tea or great fruit drink every time. So, again, I will just – I will reiterate its proprietary technology and we think it will bring a real consumer benefit.

Mark Astrachan - Stifel Nicolaus

Okay, nice.

Operator

From Imperial Capital we will go to Mitch Pinheiro.

Mitch Pinheiro - Imperial Capital

Yes, hi, good evening.

Brian Kelley

Hi Mitch.

Mitch Pinheiro - Imperial Capital

So, as it relates to your capacity your cake up capacity excluding any of your new innovation, where would sort of CapEx be for packaging equipment next year? I mean, are you seeing, can you somehow quantify throughput capital efficiency anything like that relative to cake up packaging and view pack?

Fran Rathke

Mitch, this is Fran. I think in terms of overall CapEx, I think directionally we noted this year we have taken it down from when we started on significantly lower as a percentage of sales and what we saw the last few years that we are down to about an estimated 7% of sales for CapEx this year. We right now we have installed view lines that they have excess capacity on them, but we do see with the new platform that we will anticipate it to be introduced at the end of calendar 2014 that it will use both view packs as well as cake up packs. So, I think on – I don’t see it’s having to spend as much next year on view lines, for example, but we will need it to next year. And then I think cake up packs, I think we are really focused this year on driving efficiencies and better OE or picking up the utilization rates on the lines. So, I think on CapEx next year, some of that will be tied to just new, that’s the BOLT line has the bulk brewer requires a different package right now than what we have, that’s fairly volume.

Brian Kelley

But it should continue to get lower. And as we said you know it’s 7% came down from 11% and 10% in prior years, and we said that 5% to 7% range is a good range to be in, and while there may be a year or two, where we have a big investment due to a new initiative or a new launch, we think that’s a range that we can comfortably live in. I will just give you one indication. Today, given all of the great works that our teams have done in the plants and making our cake ups even more productive, we could double our portion packs and not have another line. That’s not because we have increased the number of lines in our system, it’s because we are more and more efficient with the lines we have. And so what we might have thought was only some upside in our capacity. We have significant upside in our lines that we can drive going forward. And so that’s where the productivity is coming from at certainly one of the areas and that’s what allows us to be comfortable in the 5% to 7% as we go forward in terms of CapEx.

Mitch Pinheiro - Imperial Capital

Thank you.

Fran Rathke

Thanks Mitch.

Operator

And we will hear from Anton Brenner with Roth Capital Partners.

Anton Brenner - Roth Capital Partners

I’ve a question regarding your increased focus on the away from home margin, currently I believe the office market or at least that market doesn’t buy it's supplies from Staples or Costco, you service mostly or maybe exclusively by local and regional distributors, and I wonder to what extent you will rely on those distributors to significantly increase that office penetration as well as to establish a presence in the three other channels that you’re talking about.

T.J. Whalen

The Keurig authorized distributor which serves the office coffee service channel has been really fundamental to our growth in that part of the business and we will continue to be overtime. In some cases those office coffee service distributors also have business in other channels and in those instances of course it will make sense for us to work with them. That’s not universally the case and so as we lean forward in the away from home channels we will make choices about with whom we work and how best we can penetrate those opportunities but we will continue to work closely with our OCS distributors and get every possible door open that they can help us with.

Anton Brenner - Roth Capital Partners

When you say work with I’m not sure exactly what that means, I mean the (inaudible) that have been working with the office market for half a dozen year so we see original the national (ph) current business and it seems to have just stalled out for the past couple of years. So when you’re looking to accelerate it what really needs to change?

T.J. Whalen

I wouldn’t say a characterization is stalling out in the office coffee market is accurate or fair. Our brewer penetration continues to deepen and our portion pack business in that channel continues to grow robustly and frankly it has steadily overtime. Now as we’re talking about leaning forward we’re talking about continuing to expand that opportunity. Brian mentioned both and that brings a whole new avenue of growth potential there but we have got other ideas for innovation as well. We also talked about additional channel opportunities and Brian mentioned some of the segments that are a little bit different than the base of business for many of those office coffee distributors and so that represents a new horizon as well. John do you want to add anything to that?

John Whoriskey

I would just say as Brian spoke to the geography opportunity we have in the home, we’ve the same opportunity in the office and these are lower penetration markets as well. So that opportunity is ahead of us and as TJ said food service is a significant opportunity that we’re just staffing and building our organization to really prepare for some major initiatives in that side and we’re out generating a lots of leads into those significant opportunities an that’s a multi-channel opportunity for us.

Operator

And next we will go to Marc Riddick with Williams Capital.

Marc Riddick - Williams Capital

So wanted to startup with my normal Eight O'Clock Coffee question because our view has really been sort of focused on that being your primary competitor on that scale especially within the grocery channel so wanted if you can give us an update on where you are there and how do you feel it's going as well as maybe distribution expansion throughout the country and where they are on that and then I’ve a couple of follow-ups.

T.J. Whalen

So we’re still expanding distribution on Eight O'Clock, it's not everywhere where we want it to be although every quarter it's getting further ahead. I would say where it is in distribution, it's doing extremely well in terms of providing our consumers a different price point to access and it's got the right degree of kind of sourcing of it's volume and so it's playing the role that we really thought it could for us and it's bringing the consumer a new purchase occasion (ph) which we’re very pleased with. We have high expectations of its performance going forward.

Marc Riddick - Williams Capital

And how do you feel as far as the pricing dynamic for specifically for Eight O’Clock and because that really is the one that kind of competes with is still advanced I suppose?

Brian Kelley

We think it’s competitive. We think it’s appropriately competitive. It’s right in there. It’s not that, it’s not the lowest price portion pack in the market, but it’s competitive and it’s got a brand name that resonates with consumers. So, I think it’s appropriately priced, and certainly as volumes, does it is.

Marc Riddick - Williams Capital

Excellent. And then moving in a different direction, I was wondering about there was a little bit touched on this earlier, but maybe you could expand on this as far as the partners in the retail community up, I was wondering if you can get a sense of how they are viewing their inventory levels at this point and maybe if they are giving you some kind of indication as to their receptivity going into the holiday season? Are you getting a sense maybe vis-à-vis last year that they are looking to be a little leaner in that regard, particularly I guess, more so I guess on the brewer side, but if you could sort of give us an idea where they are on that fund and then one last and I will hold back to that?

John Whoriskey

Hi, Marc, this is John Whoriskey. I will speak to the inventory levels, particularly first on brewers. So, right now, we are in a very good position, well prepared as we head into the holidays and we start building inventories in anticipation of the significance of the seasonality of our business. And therefore the increases in inventory that we will see starting in late August into September, so I think plans are well in place to execute against our growth plans to the holiday season. And that would take virtually across all channels on our portion pack side, I think we are in a very good inventory position today, there is certainly expansion going on to as we increase shelve space and our retail presence in a number of different channels and retailers. The expansion will come through as space not additional reach to supply certainly. So, again, I think we are well-positioned as we head into the uptick preparing for the holiday across the board.

Fran Rathke

Hi, this is Fran. I just wanted to give you a quick follow up totally on the Eight O’Clock I checked that right, so as of 7/13 July 7 ACV for Eight O’Clock is 54%. So, we do have room to grow there.

Marc Riddick - Williams Capital

Excellent. Thank you, Fran. And one last thing for me and Brian I do appreciate having the first Investor Day, I think it’s really, I think that’s going to be very helpful as far as getting (indiscernible) your moves on the company. I was wondering though if you can sort of show maybe some deeper thoughts as to sort of why do it, and why do it now and sort of get a sense of maybe the thought behind setting up that Investor Day? Thank you very much.

Brian Kelley

Well, I think there is probably a couple of reasons behind it one is that I’m new that’s part of it, but I think maybe more predominantly as we have this team has been together we have now integrated the business we have got a clear plan and a strategy for where we’re going to go going forward. And I think we have learned that investors could use more information about the company in terms of where we heading strategically. And so in terms of understanding the vision where we are heading the innovation pipeline, understanding our marketing plans, our go-to-market plans as we mentioned geographically understanding what we’re thinking about away from home, what we are thinking about in retail I found and I think a number of people on our team have found that in Investor Day that is crisp, but thorough on the key issues can be very valuable to help people understand our company. And I think that’s the core purpose is to help you understand our company better.

Marc Riddick - Williams Capital

Thanks very much

Operator

And we will go to Greg McKinley with Dougherty.

Greg McKinley - Dougherty

Thanks. Just a quick follow-up, Fran, I wanted to clarify a comment made early on regarding implied acceleration and cake up unit trends in Q4 from Q3 levels is that basically reflecting if we adjust call it that $90 million of week 14 revenue out of Q4 from the prior year, how should I just want to make sure I understood your comment?

Fran Rathke

Sure, Greg. So, heading into this quarter comparing to last year, it’s part of the growth rate we are measuring into 13-week prior year. So, part of that $90 million sales is sort of attractive, but on absolute unit volume, we definitely will see an acceleration we believe how many units we ship this quarter versus next quarter, we’re anticipating with our one we talked about getting ready for the holiday and we tend to see especially the month of September extremely strong just all channels go all out heading into the, for the fall busy season.

Operator

And we will go to Akshay Jagdale with KeyBanc Capital Markets.

Akshay Jagdale - KeyBanc Capital Markets

Thanks for taking the follow-up. Brian since you’ve come on obviously even before you came on but since you came on you have done a lot of positive things, right, I mean obviously these partnerships, the earnings performance et cetera the one criticism that I guess people could levy on you since you have been here, the sales performance hasn’t been great. I mean you have been at the low end of your guidance and missing consensus something’s and more importantly from the way I see it your sales growth it's swelling, right? And the view, the negative view would be that it will continue to slow and perhaps go into the single digits.

Now we haven't seen evidence that that’s reversing, so I think I asked you the same question last time and you said we don’t see evidence of our single serve business slowing. But it's clearly slowing because of the large numbers. Now you’re pursuing many avenues for growth. So, I just want to, you know you’ve done a great job quantifying sort of the margin opportunity, the free cash flow story is playing out. So I think the earnings strategy that you're putting on growth it makes a lot in sense and it's very believable but I think where there is room for improvement in my opinion it's just can you help us understand, so first of all is your goal to accelerate sales growth from where it is and is it your goal to accelerate it meaningfully and at one point do you think we will start to see that because I mean all these initiatives take time and then off all the initiatives can you rank timing wise which ones are the most meaningful?

Brian Kelley

I’ll say there is a lot there, so let me try to unpack some of that and address it. First of all yes, it's my expectation and my hope in our goal collectively to grow our revenue faster than we're growing it certainly in this quarter and faster than you’ve seen it recently. I also understand an we’re very realistic about the fact the larger we get the large number applies and we’re not going to see the kind of 55% growth rate on a continued basis in the 40s and 30s. The healthy growth rates that we’re talking which is in mid-teens are in terms of earnings per share we’ve talked about, in revenue we’ve talked about double digit revenue growth for the long-term. I would say this, if you look at our business the growth comes because of innovation, the growth comes because we launch a disruptive innovation that consumers love, they bring into their home and it generates incremental portion packs.

We’re about to launch that in the next year, we will begin the process of launching a series of these innovations. So with the product innovation is that's what's going to drive the incremental growth? Of course we can do some things with better relationships with customers and trade, marketing and something that we can do to promote more cleverly, and do better marketing and geographic and away from home but fundamentally company of our size you don't get the kind of growth we want without having major innovation.

As we said the first major innovation really comes at the end of next year and then there is going to be a couple of them to come fairly quickly after that. I don’t want to go into them on this call but I think in September you will see that innovation pipeline and we’re realistic enough to say you don’t get that kind of incremental growth until that innovation comes and then it builds and the innovation has to work, it has to be launched on time, the consumer has to love the product and we have a number of those and we will share those with you. But that’s really what drives revenue growth in this business, at base it's innovation. It's innovation in appliances, it's innovation in portion packs and if you ask what we will do to drive revenue growth? And yes, we clearly have the goal to improve revenue growth. We'll drive innovation and that's where you're seeing our focus as a team, my focus as a team and that's where we'll be. I hope that began to answer some of your questions Akshay.

Akshay Jagdale - Keybanc Capital Markets

It did. And just one follow up. And I think you guys have said, answered this in many ways and we saw some wording on this and a filing recently. Now that you're pursuing I mean obviously you've renewing a lot of contracts and you're pursuing more contracts with new partners as well as non-licensed manufacturers.

People still don't believe that the contract that you're signing are financially incrementally beneficial to where Green Mountain is today right? And the number I point to prove that is I look at EBIT per incremental K-Cup sold and it seems to be way higher than where you're on average today and my opinion that wouldn't be possible if you're in today's environment, right? It wouldn't be possible these brands are gaining share. So, can you make a little more clear as to financially these relationships make sense what do you mean by that that will give us comfort that it allows you to grow your margins from here?

Brian Kelley

Well any partnership we do is usually beneficial. Let's start there because and again we won't talk about individual partners ever but we will say that all of our partnerships, all of them, I think we can state all of them are mutually beneficial. And so, the new ones we sign are mutually beneficial, the new agreements that we renew are mutually beneficial. You're right, that the incremental costs as we build efficiency in the base, as we get scale, our cost per pack should get better and they should continue to get better overtime as we grow.

Now, that doesn't mean if all goes to us. We have to share some of that with our partners and we do, and we do it in a fair way, we do it in a collaborative way, we do it in a way that benefits both businesses. And so, it's actually possible if you have the right kind of infrastructure and productivity and the right kind of scale and the right time of mass that you can deliver that both parties actually get better and we're pleased with the financials and so are they and as you noted the incremental when we bring in incremental partners we can do so at even lower cost sometimes. So I want to be careful not to say more because we don't to talk about any individual partnership but we’re confident we can continue particularly in coffee and we've got a system that works well, we've got a system where we’re really good at it, the quality gets better and better and better and the cost get lower. Now it's now not so low that we want to make sure that we appropriately share with our partners and we do.

Operator

And we have time for one more question and that will come from Matthew DiFrisco with Lazard.

Matthew DiFrisco - Lazard Capital Markets

A little bit of a follow up there I guess and good way maybe to end, you were speaking about innovation there and I am curious as far as in conversations past it appears though you used to have the mindset that you have the majority of the players you would need to control the category and to go along with that I guess 10% market share or so, given that the unlicensed guys doesn't seem to be that much of a better than expected number.

So, I don't think anyone would think of that number as a better than expected number for the market share gain in this first year. I guess what has changed philosophically that now you would go after or welcome those non-licensed partners? Is it their prospective that your technology is daunting or is something that they want to be on and it is that different type of thing or is there a capacity being hit on some of their own where they sit today or is that, there is something change on your end?

Brian Kelley

I'll address a couple of those items. We can't comment on what they're thinking, that's their business. Where we're thinking, we can tell you what's changed. What's changed is, today we have the ability to do it. As I’ve mentioned earlier, we had to say no unfortunately to a lot of our great customers and a lot of people that we wanted to have partnerships with and we simply couldn't because the growth of the company was too fast and the capability to grow into ourselves wasn't quite there yet given the rapid growth.

So, first and foremost, we now have capability. Second, I think the change has occurred with me, has occurred with the team as we look at this. There is a reality that is, we are a form factor. We're not just a brand, we're a form factor and when you are the form factor it's very hard to not make that form factor available to brands that consumers want and I would say the third thing is we have consumers who when trying certain unlicensed tax don’t like them or complain about them for one reason or another, they actually don't blame the pack. They blame us call, they call Keurig and they tell us that they're not pleased with this coffee or they are not pleased with this particular pack, it didn’t work in the system, it didn’t brew properly a whole host of things that are going on and we have to make sure we please consumers. And we want the brands, there are great brands in our system, and those are the things that have changed, you know, we have the capability and capacity now to do it. We are the form factor, we recognize that, we’re not just brands, we’re a form factor, and the third thing is we want to please our consumers with every brand that they want to consume. So hopefully that explains it.

I think that is it and so I would like to thank all of you for joining us today and for your continued support of our company. And we look forward to seeing many of you at our Investor Day. Thank you.

Operator

Ladies and gentlemen that does conclude today’s presentation. We do thank everyone for your participation.

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