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

F1Q10 (12/26/09) Earnings Call

January 27, 2010 5:00 pm ET

Executives

Frances Rathke - CFO

Larry Blanford - President and CEO

Michelle Stacy - President of Keurig, Inc.

R. Scott McCreary - President of Specialty Coffee Unit

TJ Whalen - VP of Marketing

Jim Travis - VP of Sales

Analysts

Mitch Pinheiro - Janney Montgomery Scott

Tony Brenner - Roth Cap Partners

Mark Astrachan - Stifel Nicolaus

Scott Van Winkle - Canaccord Adams

Bryan Spillane - Banc of America/Merrill Lynch

Jon Andersen - William Blair

Bill Chappell - SunTrust

Greg McKinley - Dougherty & Co.

Tony Gikas - Piper Jaffray

Operator

Good day, ladies and gentlemen. Welcome to the Green Mountain Coffee Roasters Fiscal 2010 First Quarter Conference Call. Today's call is being recorded. And at this time, for opening remarks and introductions, I would like to turn the conference over to Chief Financial Officer, Ms. Fran Rathke. Please go ahead.

Frances Rathke

Thank you, Delia. Welcome, everyone. If you have not received the earnings release, it is on our website at www.gmcr.com. Our website also has slides that summarize much of the information on this call. You can access them through the same link as our webcast from the Investor Services page of our website, and I urge you to view them, as they contain key messages and data we are discussing today relating to our performance and prospects.

I want to remind everyone that certain statements will be made today which are forward-looking within the meaning of Securities Laws. Owing to the uncertainties of forward-looking statements, our actual results may differ materially from anything projected in these forward-looking statements.

We can give no assurance as to their accuracy, and we assume no obligation to update them. For further information on risks and uncertainties, please read the company's SEC filings and the paragraph in today's press release that begins with the words, “Certain statements.” We also request that you ask all of your questions on this call so that our answers are available to everyone.

I have one quick announcement, we are very pleased to welcome Suzanne DuLong as our new Vice President of Investor Relations and Corporate Communication. She joined us this week and previously was the Vice President and Chief Communications Officer of Ciena Corporation in Maryland.

And now, I would like to turn the call over to our President and CEO, Larry Blanford.

Larry Blanford

Thanks, Fran. Joining us with prepared remarks in this call are Michelle Stacy, President of our Keurig business unit; and Scott McCreary, President of the Specialty Coffee business unit. After our remarks, the management team will be available to respond to your questions.

Building on our excellent fiscal 2009 performance, it is exciting to be sharing outstanding results with you again today. Our company continues to deliver superb financial results to demonstrate the resiliency and transformative nature of our unique business model. This quarter we generated earnings of $0.27 per share, up a 163% versus last year's $0.10 per share, excluding the favorable one-time settlement with Kraft.

Our first quarter net sales grew an impressive 77%, driven by shipments of 650 million K-Cup portion pack system-wide, up 82% from last year. This is the highest quarterly year-over-year increase in K-Cup shipments since Keurig became part of GMCR in the third fiscal quarter of 2006. We sold over a 1.4 million brewers this past quarter which will continue to drive our Single-Serve razor/razor blade business model going forward. We believe these strong Keurig brewer sales are largely attributable to increasing consumer awareness of and interest in the convenience, quality, and value represented by the Keurig Single-Cup system.

Looking at a longer history of our performance, since the first quarter of fiscal 2007 we have delivered average growth in sales of 56% and average growth in net income of 89%. This track record speaks to our ability to both aggressively grow sales and expand margins.

Our company success relies on employees' thoughtful execution of initiatives that enable future sustainable growth. For example, a major enabling initiative launched during the first quarter of 2010 was the acquisition to the Timothy's business, which Scott will address in his comments.

Other enabling initiatives launched during our fiscal first quarter, included the startup of new higher speed packaging lines in Tennessee, Vermont and Toronto; additional roasting and new packaging lines in our Sumner, Washington facility; the introduction of the Donut House Collection of coffees and K-Cup portion packs; and to announce pending acquisition of Diedrich which we expect to close promptly after conclusion of the Hart-Scott-Rodino.

Looking forward, there are three primary areas, which we are focusing to enhance consumer interest and our business value. The first is continued adoption of the Keurig Single-Serve Brewing System. As a measure of our success today according to the latest MPD data, Keurig is the number one dollar share reader in all coffee makers and brewers to the most recent quarter and all of last calendar year.

Our focus continues to be on expanding choices of brewers and K-Cups to increase consumers' interest in and adoption of our Single-Serve system. For example, we expect Cuisinart's new model using Keurig brewed technology to hit retail shelves soon and later this year, when Mr. Coffee brand will introduce a model that also uses Keurig brewed technology.

The second key factor in our business value creation model is leveraging the Keurig brewing system to introduce our growing family of (inaudible) brands to more consumers. The brewer is a great vehicle for consumers to gain familiarity with our brands in Single-Serve format. Then, through marketing and distribution initiatives, we will also make our coffees available for traditional drip brewing methods and multiple channels across expanded geographies.

In combination with our extensive distribution network, our growing family of brands will allow consumers to benefit by having more choices of delicious coffee and other hot and cold beverages in more places.

The third key factor in our business model is continued product development, focused on Brewer and K-Cup innovation to enhance the value of the Keurig Brewing System for consumers. The success of new K-Cup products, such as our co-developed Celestial Seasonings, Brewed over Iced Tea and our Café Escapes product line of coffee house beverages are great indicators that GMCR could now be described as a single serve beverage company. In fact this past quarter about 87% of our consolidated sales were from the Keurig Brewing System and its recurring K-Cup portion packs revenue.

To summarize, the combined result of these three factors, that is a high adoption rate of the Keurig Brewing System, geographic sales expansion of our strategic brands and new product innovation formed the basis of our value proposition to customers and consumers alike. These factors are key to how we grow our earnings, increasing shareholder value.

With our stated purpose to transform the way the world brewers business, our company continues to distinguish itself with products and services, as well as by fostering an engaged workforce protecting and sustaining the environment and supporting the local and global communities where we do business. Our most recently published corporate social responsibility report is available on our GMCR website under brewing a better world.

Consumers appreciate our values and the opportunity to make a difference by selecting our products. Our commitment to corporate, social and environment responsibility appeals to business partners like Newman's Own Organics and it helps us to attract and retain a very talented group of employees and board members. In this regard, I'm very pleased Douglas Daft has joined our Board of directors. Doug is the former Chairman of the Board and Chief Executive Officer of the Coca Cola Company. He also serves on the Boards of McGraw Hill Group of companies and Wal-Mart stores.

Doug's insight to knowledge will be valuable as we weigh the opportunities before us and continue our transformational leadership in the beverage business.

In summary, we are changing the way consumers enjoy their coffee and other beverages, both at home and away from home, while staying true to our values and retaining our commitment to all our stakeholders. At the same time, we are carefully executing on a strategic and aggressive plan to grow GMCR sales and earnings and build value for our shareholders.

Now, I would like to turn the call back over to Fran. Fran?

Frances Rathke

Thanks Larry. I too – I am very pleased with our outstanding top and bottom line financial performance this past quarter. For details regarding our results, we invite you to read today's press release available on our website. As Larry noted, net sales for our first quarter totaled $349 million, up 77% over the same quarter last year.

The main drivers of this growth were first the 111% increase in dollar growth of the company's K-Cup sales to retailers, supermarkets, consumer direct and to the office coffee channels. And second, the 86.5% increase in Keurig Brewer sales and accessories during the holiday season. Please look at our slides for these and more financial highlights.

Our growth margin improved 200 basis points over last year, which is notable as typically during our first quarter we have downward gross margin pressure due to the seasonally high percentage sale coming from brewers, which are sold at approximately cost.

This improved gross margin was due to the higher Specialty Coffee business unit gross margin. The improvement was driven by manufacturing efficiencies, combined with the higher manufacturing gross margin due to the increase in volume of our manufactured K-Cups as a percentage of total system volume.

On November 13, we acquired Timothy's wholesale business for a $157 million, using cash from our August 2009 equity offering. This acquisition was slightly accretive to earnings excluding the one-time acquisition related expenses. The new FASB ruling dealing with business combinations became effective for Green Mountain Coffee Rosters starting this fiscal year.

In the first quarter, we incurred approximately $5 million of M&A expenses for both Timothy's and the pending Diedrich acquisitions, which are included in the G&A expense line. Even with these onetime acquisition related expenses, SG&A margin improved slightly over last years first quarter SG&A margin to 22.5% of sales from 23% of sales, excluding the prior year's 17 million patent litigation settlements.

Our first quarter operating income increased 190% over the prior years quarter with significant operating margin improvement to 6.6% of sales from 4% of sales. Looking forward to the rest of fiscal 2010, we anticipate operating margin improvement driven by stronger year-over-year high growth margins with SG&A margins more in line with prior year comparable quarter margins with the caveat that these estimates exclude any additional onetime acquisition related transaction expenses.

The company's tax rate was 43% as compared to 38.9% in the prior year quarter. The difference is due to a portion of the acquisition related expenses not being deductible for tax purposes. Weighted shares outstanding increased 18.6% or 7.2 million shares during the first quarter of 2010 over the prior year quarter mostly due to the August 2009 equity offering where 5.8 million shares were issued.

Net income per diluted share for our first quarter was $0.27 per share, up a 164% as compared to $0.10 per share in the first quarter of 2009, when excluding the 27% per share patent litigation settlement and above our previous estimates of $0.10 to $0.16 per share. Our actual first quarter financial results exceeded our previous estimates primarily due to the stronger top-line growth and a higher gross margin.

Looking forward now at our latest financial estimates, please keep in mind that my remarks and all other information we have released is based on current expectations and our belief that we can achieve this growth. As such, the estimates involve many risks and uncertainties. We are raising our estimates for both sales and earnings growth for this fiscal year. This increase is based upon the sales growth and margins we achieved this past holiday season and the higher installed base of Keurig Brewers underlying that growth.

For fiscal year 2010, we now expect total consolidated net sales growth of 57 to 62%. We anticipate total K-Cup shipped system-wide by all Keurig licensed roasters to increase in the range of 73 to 78%. We anticipate an operating margin in the range of 11.8 to 12.5%, excluding any one-time acquisition related transaction expenses for the pending Diedrich acquisition above the amount incurred already in the first quarter of fiscal 2010.

We expect fully diluted GAAP earnings per share in the range of a $1.95 to $2.05 per share, up from prior estimates of a $1.85 to a $1.95. The fully diluted GAAP earnings per share estimates include $11 million pre-tax or $0.15 per share non-cash amortization expenses. These expenses are related to the identifiable intangibles of the company's acquisitions and exclude any one-time acquisition-related transaction expenses for the pending Diedrich's acquisition above the amount already incurred in the first quarter of fiscal 2010.

For the second quarter of fiscal 2010, we expect total consolidated net sales growth of 64 to 69%. We anticipate an operating margin in the range of 14 to 14.7%, excluding any one-time acquisition related transaction expenses for the pending Diedrich's acquisition above the amount incurred in fiscal first quarter of 2010.

We estimate that fully diluted GAAP earnings per share will be in the range of $0.56 to $0.61 per share. The fully diluted GAAP earnings per share estimates include $2 million pre-tax or $0.03 per diluted share for the non-cash amortization expenses related to the identifiable intangibles of the company's acquisition and exclude any one-time acquisition related transaction expenses for the pending Diedrich's acquisition. This compares to the prior year fully diluted GAAP earnings per share of $0.33 per share.

As previously announced on December 7, 2009, the company entered into a definitive merger agreement to acquire Diedrich Coffee Inc. for $35 per share in cash pursuant to a cash tender offer in a transaction with the total value of approximately $290 million. The company will finance this transaction through cash on-hand and its existing bank lines of credit. The transaction is subject to customary closing conditions, including regulatory approval.

We anticipate that this transaction will be neutral to slightly accretive within the first 12 months following the close, excluding one-time transaction expenses and accretive thereafter. Other key factors including interest expense, tax rate, CapEx, and annual depreciation and amortization are explained in today's press release.

And now, I will turn the call over to Michelle Stacy.

Michelle Stacy

Thank you, Fran, and good afternoon, everyone. It's very exciting to report another outstanding first quarter holiday season for Keurig. Total brewers sold during the quarter equaled 1.47 million, which are 755,000 more brewers compared to the 711,000 sold in Q1 of 2009.

The significantly higher brewer unit sales combined with a 158% increase in K-Cup sales to retailers and to consumers from Keurig.com propelled Keurig Q1 sales to 218 million, up a 106%. This exceptional brewer growth is driven by several key factors. Keurig Brewers continued to have extremely strong consumer appeal. 90% of Keurig owners are actively recommending the product or giving it as a gift, and these highly satisfied Keurig owners, who passionately endorse the brand, are our best advertising.

Additionally, during the first quarter, we made significant investments in TV advertising, in-mall and in-store demos, merchandising and key marketplace events, spending over $14 million. Lastly, during the quarter, we received outstanding retailer support with excellent in-store display and increased retailer advertising. For example, Keurig was featured in retailer TV advertising for Kohls and JCPenney, and we were featured on either the front cover or back cover of circulars from Macy's, Kohls and Bed Bath & Beyond.

As a result, aided brand awareness for Keurig moved from 24% in October to 40% in January. And as consumers become more aware of the benefits of the Keurig Brewing System, the demand for our product continues to increase as the most recent MPD data indicated. Keurig is a number one coffeemaker brand.

We achieved a 41.3% dollar share of the overall coffeemaker dollars in December, a 36.6% dollar share for the quarter and most significantly a 25.4% dollar share for all of 2009. As Larry already indicated these figures were all the number one position for all coffeemakers and Keurig's dollar share was more than double the leading competitor during both the quarter in December.

Keurig Brewer models are the top four brewers in the category. Unit share also experienced similar gains with December at 23.2%, up 13 points and the quarter at 18.6%, up 10.5 points. Continuing with our strategy to introduce innovative new products of the like consumers, during Q2 we're excited to launch our new Mini Plus brewer, which incorporates several changes from the Mini Brewer.

The new Mini Brewer heats water to a higher temperature in a faster time and then incorporates an easy to fill water reservoir. We expect this brewer to launch on our website during Q2 and then roll to retail during Q3 at a price of 99.99. Another important highlight for the quarter was the strong growth of the Away From Home business over a soft year ago quarter.

Several key initiatives helped to accelerate the growth in this vital segment. First, we realigned our small office product pricing to offer more value within our wholesale distribution channel in on Keurig.com; second we launched an upgrade version of our award winning large office brewer and third we strengthened the focus of our sales efforts on major national count opportunities such as Staples, Office Depot and ARAMARK.

We expect this commercial business sales momentum to continue in the second quarter when we are launching the new B150-155 brewer. This new brewer has several exciting features including our largest removable cold water reservoir, plum capability and a user friendly touch screen interface.

We believe these features will make an ideal brewer for the workplace. Our Away From Home business remains a key growth driver at Keurig. Large numbers of Keurig consumers first experienced Keurig in an office or hotel and then went on to purchase at our at home products. We are excited that both the retail and the office businesses are growing at significant rates.

Our success in increasing household and office penetration of Keurig Brewers will continue to drive higher system wide K-Cup shipments. Scott McCreary will share with you more details of our Specialty Coffee and K-Cup business.

Scott McCreary

Thanks, Michelle. The Specialty Coffee business unit continues to deliver strong performance with the Keurig System and K-Cup's at the heart of our growth strategy. Our multichannel distribution approach is driving K-Cup sales growth with significant increases in all at Home channels including supermarkets and club, consumer direct and our sales to Keurig, where they capture the ultimate sales to retailers.

Momentum in supermarkets continues to accelerate. We announced selling the 12 count K-Cup package in about 10,000 stores with about 1500 new locations added in the past quarter, including Kroger, Safeway and Publics.

We have 24 items available to supermarkets and are executing an impressive four-foot shelf set of K-Cups and Brewers with strong retailer support across the Northeast. IRI data shows rapid growth of K-Cup portion packs sales with year-over-year dollar sales of our brands, up 302% in grocery during the past quarter. According to IRI data for Northeast region, dollar sales for K-Cups sold in supermarkets now outsell both Starbucks and Dunkin' Donuts bag coffee sales.

Our performance is due to three factors, our significant distribution gain, new product and brand introductions, and the growing consumer demand for K-Cup portion packs. With distribution of K-Cups to essentially all warehouse club stores nationwide, first quarter sales have increased 315% versus the same period last year.

Our family of brands is available in approximately 1,000 Costco, Sam's and BJ's stores and we have increased our product offerings across our brand portfolio. At the same time, the Away From Home business is picking up steam with double-digit sales growth this past quarter of 17%. We have planned some exciting new initiatives to build upon this trend, such as an office lobby sampling tour in 10 major geographies, distributor lead generation and the launch of an Office Kitchen Makeover Sweepstakes.

As Larry mentioned, we are continuing to drive K-Cup innovation, a new product introduction which have resulted in strong consumer excitement. Even with limited availability, Donut House collection is already exceeding early sales forecast, and we are experiencing increased consumer demand for our Café Escapes line of indulgent dairy-base K-Cups and Perfect Iced Teas for brewing over ice.

We have a very exciting pipeline of new product introductions planned for the US and Canada in 2010. It is a truly exciting time to be at GMCR as we integrate our strategic acquisitions. This past quarter, we expanded distribution of Tully's K-Cups in grocery and club and Tully's is now featured prominently in our catalogs and on our website.

We held a grand opening of our new Sumner, Washington manufacturing and distribution location on December 1st. The new facility will support the growth we are planning for the Tully's business.

We completed our acquisition of Timothy's World Coffee brand and wholesale business on November 13th and are making great strides on the integration into our portfolio. In December, we completed the installation of a new high-speed packaging line, which has enhanced the capacity at our Toronto location.

We continue to invest in our capacity across all our manufacturing sites and are pleased with the progress we have made in delivering the efficiencies and improve gross margins, which usually reflected in our results today. These investments will ensure we continue to exceed customers' expectations for freshness and quality and provide the ability to produce multiple brands at our various locations to leverage transportation savings and shorten distribution cycle.

As we integrate Tully's and Timothy's into the Green Mountain Coffee family, we are also very focused on delivering results and other operational and process improvements as well as investing in and leveraging the strength and contributions of our employees. We are focused on balancing margin and earnings expansion with investments and growth, as we continue to build shareholder value.

On that note, I will turn the call back over to Larry.

Larry Blanford

Thanks, Scott. Fran, Michelle, Scott and I are joined today by John Whoriskey, General Manager of Keurig's At Home division; and Dave Manly, General Manager of Keurig's Away From Home and Direct business. From our Specialty Coffee business unit, we have TJ Whalen, Vice President of Marketing; Jim Travis, Vice President of Sales; and Jon Wettstein, Vice President of Supply Chain Operations.

We will now start the question queue.

Question-and-Answer-Session

(Operator Instructions). And from Janney Montgomery Scott, we have Mitch Pinheiro.

Mitch Pinheiro - Janney Montgomery Scott

It is hard, but there is always follow-up. So Hart-Scott-Rodino, any update on the timing, have you complied with the second request, yet, and set the sort of the clock ticking?

Larry Blanford

Mitch, obviously it's a regulatory process. It has its own timing. We are in the process of working through the second request and complying with it. And as we said, once the Hart-Scott-Rodino process period reaches its conclusion, we would expect to close the transaction promptly afterwards.

Mitch Pinheiro - Janney Montgomery Scott

So you haven't delivered the second request?

Larry Blanford

No, not at this point. I mean, we just received it here a couple of weeks ago, and we are certainly working on and preparing our response to the questions in that request.

Mitch Pinheiro - Janney Montgomery Scott

Second question and then I'll get back in the queue. But the margins were very impressive in the quarter, gross margin was obviously a lot better than expected in thinking that selling in the heavy brewer season, very low margin brewer growth, margins would weigh that down, but in this quarter they were better than expected.

And then when you look at G&A, not only in this quarter but maybe going forward, is there something in G&A, is there a reversal here where we're going to see better gross data, gross margin and maybe less G&A growth or SG&A growth? Can you sort of talk about the dynamic between those two line items?

Frances Rathke

Sure, Mitch. This is Fran. As I stated in my remarks, we did it, we were very pleased with the gross margin and normally this quarter that we just had, because we have such high percentage of our sales with the brewers where we rally don't have any gross margin. We're extremely pleased with as you said the strong margin expansion.

And in terms of, as we look at the rest of this year, we continue to be comfortable that we'll see improved gross margins. Last year, if you recall, we had a lot of operating margin improvement, primarily driven by strong SG&A margin improvement. I think this year, we're going to see more gross margin improvement and SG&A, still being efficient, but not in terms of major improvements, in terms of reduction of those SG&A margins as a percent of sales.

Mitch Pinheiro - Janney Montgomery Scott

Is there any increase in advertising related to that or selling sales force or any step change in that expense?

Frances Rathke

Well, this quarter, I think Michelle and McCreary mentioned, we had about $14 million of the TV media spend. So that was definitely a significant increase over last year, but as a percentage of sales, it was fairly similar and now we grew sales so much. In terms of the rest of the year, we do need to continue to ensure we have an appropriate, on the G&A side, infrastructure, whether its analytics or people managing the business. I think the sales force, we don't have any significant investment larger than our rate of growth in sales, but I think we're just ensuring that we have appropriate infrastructure to manage this growth.

Larry Blanford

We do have maybe some additional funds in the third quarter versus last year, as we do plan to be introducing a number of new products as Scott mentioned and Keurig does have some television advertising lined up in support of Mothers Day and Fathers day this year, where we did not last year to create excitement with the trade and not only about our new Brewer line, but also the new beverage products that we'll be introducing and we have a number of demos that we are planning in store to support those new beverages that we'll be bringing forward.

Operator

Our next question comes from Tony Brenner with Roth Cap Partners.

Tony Brenner - Roth Cap Partners

Two things, number one, just, do your projections and guidance assume the confirmation of the Diedrich acquisition with respect to sales growth.

Frances Rathke

No, our projections do not include any Diedrich's numbers in them. At this point, it just has obviously Timothy's because we closing that transaction in November.

Tony Brenner - Roth Cap Partners

Second, I wonder if you could provide some insight as to how the rate of increase in Brewer sales in the quarter different but differed by geography, particularly in your most mature and least mature markets in Northeast versus the West Coast.

John Whoriskey

What we are seeing is higher growth rates in percentage terms on the West Coast and a very strong sales on the East Coast and that speaks to a brand that's been probably more well established East and gradually now we are seeing rapid expansion as we go across the country and we believe based on all of our research that the only thing that's holding back reaching penetration rates out West versus the East is awareness. And we are making substantial investments in advertising et cetera to really to speed that up and move that forward.

Tony Brenner - Roth Cap Partners

Or could you reign in the range a very strong or little bit? I mean what does that mean on the East Coast?

John Whoriskey

Well, we don't release our publish data geographically or by region, so I am sorry, I can't give you specific on that.

Larry Blanford

We would see in the At Home market penetration in certain East Coast markets several times that of the West. So the good news is, as John indicated that even in the East, we continue to increase consumer adoption and see increased levels of At Home penetration. So, we're very encouraged that we have the opportunity ultimately to bring the rest of the country up to the same levels of usage and adoption that we see in the East, so it's very exciting. But good question.

Operator

Moving on to Mark Astrachan with Stifel Nicolaus.

Mark Astrachan - Stifel Nicolaus - Stifel Nicolaus

On the breakout of the Specialty Coffee business, I am curious why the revenues were not more given the strong K-Cup growth and I am curious what does this imply about the split between the Royalty and the Green Mountain owned K-Cups. And then the sales between those handled in the Keurig segment, which are national accounts I believe and those done by the Specialty Coffee business unit. And then, sort of related to that where does the accessory business fit into the P&L and what is the size of that and the approximate margin of that business?

Frances Rathke

In terms of your first part of your question about, could we explain the difference in the K-Cup business from the Specialty Coffee, as you know the Specialty Coffee business directly sells K-Cup to the grocery channel, the supermarkets, office coffee and all those our consumer direct business. In addition, we sell K-Cup sales, the Keurig business unit ends up with those and their P&L to the retailers and also a consumer direct business, which is keurig.com.

And in terms of the business, our total company we had extremely strong sales company wide, selling to all of these third party channels. In my remarks, I mentioned that K-Cup sales to whether it's a retail or supermarket consumer direct to the office coffee was up 101% in dollar. So the Specialty Coffee business grew 44%, in terms of the K-Cup sales in there, we don't break out how much of that was K-Cups but albeit I'm sure it was at least 44% growth.

But I think this quarter, we saw very, very strong K-Cup dollar sales in the retail channels, so that I think is a little bit of why Specialty Coffee isn't that high as the total system, because I think we had stronger sales in K-Cups for the retailers this quarter. Your second question...

Mark Astrachan - Stifel Nicolaus - Stifel Nicolaus

Accessory business?

Frances Rathke

Accessory business, as part of Keurig, we sell a number of the accessories. We don't break them out in terms of components of sales. We have good, very strong margins in those items. And we feel that business is continuing to grow nicely.

Mark Astrachan - Stifel Nicolaus

Just related to the first part of the question, I guess I'm just still trying to understand what the split is then between the grocery and other, and those on the national or larger retail (inaudible) you are selling through the Keurig segment. So I guess what that implies is, the national accounts through the Keurig segment are a lot stronger than what it would be through the specialty business. Does it also imply that the wholly-owned brands, the Green Mountain produced brands, the Tully's, Newman's Own are growing slower than some of the other businesses?

Frances Rathke

No, Mark, I think it's just as I tried to articulate, I think the reason the K-Cup sales for the company were up more than the 44% just for the total sales for the specialty coffee business unit was primarily driven by stronger K-Cup sales dollars in gross to the retail channel to the retailer.

Mark Astrachan - Stifel Nicolaus

Just one other quick question relating to the importance of Keurig in these large national chains, have you talked a bit about changing the relationship with M Block to potentially deal there more directly with some of those retailers or would you want to do that?

Michelle Stacy

I think what I'd like to say is that M Block has done an absolutely superb job of continuing to meet our growth in the end, meeting our warehouse demands and our supply demands as we've grown and we continue to view them as an exceptional partner to the business. When we interface with any of our retailers, John Whoriskey and his team have a team of sales people. So the interface with the actual retailer and the buying team at the retailers is us. M Block really services us in managing both the order and the shipping to that customer and they have been absolutely fabulous in meeting the retailer demand.

Operator

Next in our queue, we have Scott Van Winkle - Canaccord Adams with Canaccord Adams.

Scott Van Winkle - Canaccord Adams

I'm glad it was a good holiday for you. If I could get like maybe John and Michelle on a question to give me their thoughts, Larry you mentioned the marketing efforts around Mother's Day and then in brewer and some of the things away from a holidays, I'm wondering if there is – an effort both the marketing, the sales effort to take this – to kind of blend out the seasonality of selling brewers.

And I would assume with the longevity of the business now, there's going to more of replacement cycle between holiday gifts giving and do you change the marketing methods? To me, it seems like we're going after men selling – buying for wives in the holidays and does that change throughout the rest of the year. And I'm wondering if there is a different marketing effort coming here in the next nine months before the next holiday?

John Whoriskey

I would say, Scott, that we are such in an early stage of developing this business that the seasonal effect of this product really probably speak to the excitement and the enthusiasm for what we have to offer, but we have so much runway in front of us, that I would say right now its really about growing and expanding the awareness of what our products ultimately delivers and why its so – I'd use the word disruptive in a sense that it is such a new technology that people are just starting to learn about in the dark. So I think we're at the very early stages and I think the more we can encourage and work those issues over the key holiday gift giving timeframes, the better. We certainly want to leverage that.

Scott Van Winkle - Canaccord Adams

Was there or is there a difference I am, again, looking for the rest of the year and as investors talk to retailers, is there a different mix coming up going forward and where product is sold? There was lots of commentary about the strength and department stores and chatter over the holiday periods.

I am wondering if it kind of leans out more towards the discounters in the rest of the year. I am just wondering what to look for, when I look for how store sets are in the rest of the year away from holidays. Sorry to pile on the questions, I am just looking forward next couple of quarter.

John Whoriskey

Let me see here if we can get that, we will get a little help. Scott, what we saw I think over this holiday season was we exceeded like all the retailers expectations to the point where the advertising, all the efforts we put into this marketplace over the holidays. We are, basically, catching up to rebuilding inventory levels as to speak. And that is across all channels of distribution from the most mature retailers that started with us back in 2004 to the newer ones that have been whether it be Wal-Mart this past spring season last year.

So, it's really across all channels and it really speaks to I think our strategy and our product line approach and pricing different brewers for different channels of customers. I think it's all blended very well to say that, coming out of Christmas now our retail partners are looking to expand further space in our merchandising and really get ahead of the Christmas 2010 season, which we're already starting to plan.

Scott Van Winkle - Canaccord Adams

Michelle, you gave data on aided awareness and how it's grown after a circulars and stuff in the holidays from October to January. Did you have any data on purchase intent from surveys or things of that nature.

Michelle Stacy

We certainly collect that. We have not been sharing that at this time period. We did share the awareness numbers of 24 growing to 40, which is just outstanding. In fact, many of our retailers have actually said to us that they've never experienced a product like this and in marketing terms of trying to find a product that almost doubles its unaided awareness in a quarter is absolutely phenomenal. So I think the level of brewer sales kind of indicates just the relative level of purchase intent once the consumer becomes aware, it's very high.

Scott Van Winkle - Canaccord Adams

I guess to the other side of the business. How do you measure K-Cup just giving, I mean one of the things I heard in my conversations of stores was that there were people buying K-Cups as gift without buying a brewer and I know, last quarter we talked about, there was a question about the lag between brewers and K-Cups and the commentary was that people seeing to buy a box of K-Cups or something with a new brewer, but this year I didn't hear, last year there was a lot of talk about people just buying boxes of K-Cups as gifts. Did you see that as a something that was reported? Is this something that we have to consider when we go into the March quarter and so whether more K-Cups were given at the end of December and does that affect the timing of the next refill of sales?

John Whoriskey

Let me try and answer that one question. I think this is the first Christmas season where we have launched variety packs, holiday seasonal packs in multiple quantities, and also seasonal varieties we started and also Café Escapes over the holiday season as well. And we certainly saw incremental PLF results to all that.

We certainly know that. I mean understanding more how much incremental consumption is there, I think we still are trying to digest and learn from that. But it's very clear that the gift giving and the expansion and the choice varieties of having something different over the holidays and giving a box of 48 K-Cups is certainly, we were surprised with the results, very pleased with the results.

Operator

Let's move on to Bryan Spillane with Banc of America/Merrill Lynch.

Bryan Spillane - Banc of America/Merrill Lynch

So two questions, first for Fran, just there is about $73 million of cash on the balance sheet at the end of the quarter and so in terms of filling the gap, in terms of financing Diedrich, will you be pulling down the revolver to do that or what are the plans to sort of finance that gap, that difference?

Frances Rathke

Yes, we will right now at the end of this quarter that we just reported. We typically are at our peak in terms of tapping into working capital. So typically towards the end of January, February, we see a positive cash flow coming in, in terms of the receivables et cetera. So we expect to finance Diedrich with the cash on hand as well as using our credit facility.

Bryan Spillane - Banc of America/Merrill Lynch

Will you do longer term. Will you term that out or you just look to try to pay it down with cash flow overtime?

Frances Rathke

I think we will be evaluating our capital structure, our credit facility, the size of it, the term, the credit facility is terming out at the end of December 2012. We're just looking at our size of it now in terms of as we're growing so fast. So we'll be, we've got a couple of options, but mostly just looking at the size of our credit facility down the road.

Bryan Spillane - Banc of America/Merrill Lynch

Larry, this most recent quarter, Keurig share of total coffee unit makers, if I am looking at this right was up 18% of total coffee makers unit sold?

Larry Blanford

Yes.

Bryan Spillane - Banc of America/Merrill Lynch

That's a pretty, from lack the last couple of fourth quarters, five and sevens and sixes and eights. So you're getting close to 20% of the coffee unit, coffee maker unit sales and it's a pretty eye popping number. Two things, has that at this point created any competitive response from manufactures of drip coffee makers first, and then second for companies that are heavily reliant upon selling bagged coffee or drip coffee, has that caught their attention that in any way that you could determine?

Larry Blanford

I'm going to respond to your questions, since you directed at me. First of all, we're very pleased with the 18.6% in the fourth quarter and again it doubles our unit shared doubled and our dollar share doubled over the same quarter prior year as we have now put a string of these together.

In terms of the overall market, the coffee makers/brewer market is extraordinarily competitive, as is the highly fragmented coffee business itself. So these are large and they are very competitive. With respect to the coffee maker brewer side first, certainly we are success in that particular side of the business is interesting to others, and it is a result of that interest that last June we were able to announce that we were bringing on Jardin with Mr. Coffee brand and Conair with the Cuisinart brand as partners.

And as I mentioned in my comments, we would expect the Cuisinart brand, which will be cobranded, Cusinart, Keurig brewed to be launching very soon, and as we've said and we still believe that we're on track to see the Mr. Coffee brand launch with Keurig brewed technology in the second half of this calendar year. So they certainly are very interest, and their response has been in case of those two particular manufacturers certainly to try to find the way to license the technology.

Certainly other manufacturers are responding and we still have very strong competition from Kraft, who owns Tassimo and certainly in the Away From Home market, we have Mars, who owns the Flavia system and of course (inaudible) which is a joint venture of (inaudible) and Philips has launched a new (inaudible) brewers. So it's very competitive. On the coffee side, we are still a very small percentage of the total coffee business and we do continue to evaluate the portfolio of coffee brands that we offer.

And as we go forward, we'll continue to evaluate that and there's possibly some opportunities for some other brands to participate and we'll continue to evaluate that. But certainly consumers have very significant choices, and there is lot of levers that the competitive manufactures of coffee have to try to lower consumers to their products and drip brewing or other forms of Single-Cup brewing.

Operator

Next up, we have from William Blair, we have Jon Andersen.

Jon Andersen - William Blair

Sticking with your point on the K-Cup brand portfolio for a minute, one of my questions is, just figure your thoughts on the current stable of brands that you do have available for Keurig system and whether you foresee additions to the portfolio, perhaps through new licensing agreements or other means, or whether you expect the current lineup of brands to remain relatively stable for the foreseeable future?

Larry Blanford

Well, thanks Jon. Yeah. The Keurig array of brands that we have obviously very important to the value proposition of the brewing system to the consumer. Variety and choice of brands and gross types, etcetera are a big part of the excitement of the Keurig brewing system. So, those are important to us.

From a customer standpoint, the brands that we have in the portfolio are very important also in that we can work with our broad distribution channels to try to make sure that those channels and the specific customers within those channels that we're working with them and utilizing the set of brands that we have to work with them to best match those brands with their own consumer demographics to provide enhanced value to their customers. So the brand portfolio is very important.

Going forward, as I kind of indicated a few minutes ago, we continue to evaluate that brand portfolio and over time, we could elect to add other brands that could be via acquisition or license, but nothing to specific to speak to at this time.

Jon Andersen - William Blair

Could you talk a little bit about the addition of Douglas Daft to the Board and what is beverage into your industry experience brings to the company and whether that might help shape or be a reflection of things to come down the road?

Larry Blanford

As I indicated, we're just very pleased to have Doug joined the Board. He has a long career previously with the Coca-Cola Company as well as very significant international experience. As we have begun to move our business to additional product opportunities for the consumer, Doug's experience will be very, very helpful. So as I have spoken previously, now over a year ago we really started to think about our opportunity as much broader than just great coffee and tea, and certainly we've always been about great coffee, we are now and we will be going forward.

But we started to understand that once the brewer was on a countertop either in an office or in a home that that was precious space and that there was an opportunity for us to provide to the consumer by broader array of products to enhance their enjoyment with the system.

And so we started to define our opportunity really as the household consumption of non alcoholic and non carbonated beverages. So that would include coffee, tea and other beverages, hot and by brewing over ice, cold beverages. And of course our first product that we introduced was last June in kind of a broadened test market, which was Celestial Seasonings brewed-over-ice line of teas, but we indicated that if you look at the large non carbonated Single-Serve, ready-to-drink beverage business in this country, it's enormous.

And we believe that our brewing system by being able to extract fresh flavors, aromas, ingredients into the brew stream and deliver that over ice that we can deliver to the consumer some great products and win in teas test versus existing products that are out there. So this gets absolutely into the experience space to your question of Doug Daft. And he is already been helpful to us, he is got through our board meeting in December and his council and his insights are very, very helpful.

So we're very excited about his addition to the board and yes it is an indicator of where we think we're going. And as I said, we've started out as a wholesale specialty coffee company, moving to kind of a platform company, moving to a beverage business and I think you'll us expand broadly going forward.

Jon Andersen - William Blair

Can you give us a little more color on the plans with Cuisinart and Mr. Coffee, how those, perhaps how may SKUs you expect to get retail, how those products will be differentiated from your current Keurig product line in terms of features and price points, and whether you are expecting a certain degree of cannibalization and whether that's part of kind of a broader strategy to mix shift your business more towards the consumable or K-Cup side over time.

John Whoriskey

Consistent with the brands that are bringing our technology to the market, Cuisinart is a premier supplier of small appliances. And so consistent with the brand positioning in the marketplace, that's how they will bring our product to market and you would consistent with their distribution strategy of department and specialty stores, so I really can't speak specifically to how they are going to price the product and so on, but you can consider that to be a premium priced product at launch.

In terms of Mr. Coffee, if you view, where they sit in the marketplace today and a good better best offering in any particular retailer, usually they are going to be the good offering as it fits with our product line and where they are distributed a very strong mass merchant brand in stores like Wal-Mart and Target. And so, appropriate with the price point that would fit with that is where they will position it in a different technology than say Cuisinart but really beyond that I don't think we can comment until their products are actually officially announced on the market.

Jon Andersen - William Blair

Are you expecting a certain degree of kind of cannibalization of Keurig machines, I'm assuming it will be on the shelf in similar channels and similar retailers?

Michelle Stacy

I think the first thing that we really expect is that its going to do an expansion for us, because we're going to be offering the consumer more choice in the types of brewers that the brands of brewers they can purchase for the Keurig System and we actually believe we'll continue to accelerate the adoption. I think the other part of it is its going to offer the consumer more – it will expand the shelf base the Keurig Brewer will have in each of the channels.

So I really think that the brands – the complement of having both Cuisinart and Mr. Coffee alongside Keurig in the retailer will first of all create an expansion of the total Keurig brewed system and drive and encourage more consumers to adopt it. I think after that, yes I don't know exactly how that mix will fall, but we may see some draw of the Keurig business, but as we've – as we've seen, every single Keurig brewed system that we get out there and we get the consumer to adopt continues to build our K-Cup stream and that's what we – that's why we brought these other companies to share with us in this growth.

Jon Andersen - William Blair

Thanks Michelle, that's helpful. One last quick question for Fran, has the cost of producing a K-Cup changed at all over the past 12 months or so given – I know that you talked about introducing faster packaging lines from Tennessee and Vermont and – the kind of the trend of Green Coffee being cost?

Frances Rathke

Sure John, this is Fran. As we experienced this past quarter, we improved our gross margin – essentially from Specialty Coffee business unit, where we manufacture the K-Cup. So we have seen improved cost structure for manufacturing a K-Cup with the investments we've made in the higher speed line. In terms of coffee cost – I think this quarter coffee was slightly lower than it was on the comparable quarter, so we did see some favorable trends there.

Larry Blanford

I just like to pay a tribute to our employees who might be listening in because they are doing a tremendous job improving the quality, the efficiency as well as the rates of the Keurig packaging lines throughout all of our sites, really just a great job and certainly we as Scott mentioned we are seeing a little bit of that coming through in our gross margin.

Operator

Next we have Bill Chappell with SunTrust.

Bill Chappell - SunTrust

First, I guess question on the guidance as a simple, you beat the high end of your range for the quarter by $0.11 raised by 10, is that conservatism, is that now including these new charges for the transaction piece or is there anything of them missing.

Fran Rathke

In terms of the guidance, we do spend quite a bit of time updating our estimates all the time. I think the reason that we provided these estimates is, this is our best case, what we believe is going to happen in terms of financial results. I think as I said, these exclude any of the Diedrich's M&A cost that we're going to incur in Q2 on so, those are not an estimates. And I think, we do as we've articulated, we do need to continue to build infrastructure and invest in the business to continue on this growth and it is over the balance of how much is that going to either help or hurt the P&L in a given quarter.

Bill Chappell - SunTrust

One, kind of the on the same line, I know you're talking about Diedrich being neutral to accretive in the first year and I think in the press release is that Timothy's was already accretive this quarter. Is that just because of the financing differences of using debt versus cash on the balance sheet or is there anything fundamentally different between two businesses?

Fran Rathke

In terms of Timothy's, we brought November 13 with the cash, although that was financed with the equity. So we do have 18, 19% increase in shares outstanding. So I think the reason Timothy's was slightly accretive once again excluding the M&A cost that are running through the P&L this quarter. I think we would anticipate Diedrich's getting up to speed just as quickly, they are about the same size business. But I think the reason that we're saying will take more like a 12-month period is due to the purchase price being higher.

Bill Chappell - SunTrust

Just one last question and a follow-up on advertising. I mean how should we look at it on a go-forward basis in terms of, you start switching more advertising towards K-Cups as competitive, the licensed Mr. Coffee or Keurig comes out there or you even looked in another way. After this holiday season, have we started to flat toe in terms of getting diminishing returns from increasing ads event?

TJ Whalen

In regards to advertising on the coffee or beverage brands, we do have fairly significant efforts under way in key markets. In fall and holiday, we were matched with the Keurig business in certain geographies where we wanted to see enhanced growth. Those efforts continue now as we introduce new beverage varieties and introduced new consumption opportunities to this system as Larry referenced.

We would see that spend is continuing forward roughly commensurately here on a quarter-to-quarter basis in terms of what we've done in the first quarter, but that is certainly a big part of our vision moving forward. As Larry said to drive demand through the Keurig system behind these brands, leverage that demand and ultimately present the consumer with a wide variety of choices that are attracted to them, continue to facilitate system adoption and ultimately build shareholder value.

Larry Blanford

I mean, obviously, what's really driving our value creation is K-Cup demand and there is really two primary drivers of that. One, obviously, is brewer sales and brewer sales growth. And we are very pleased with our numbers, but obviously as they grow the law of large numbers may slow that growth rate even though we'll be selling them each year, we would hope increasing number of brewers and obviously, growing the installed base. But the other key driver of K-Cup demand is this expanded set of beverage opportunities.

So both of those are very, very important obviously right now it's brewer adoption that's driving that demand, but we're very pleased with our new beverage efforts. In fact, The Café Escapes is more than kind of exceeded our expectations to the point where that along with some scale up issues, we've struggled a bit on that particular product line to meet all of the demand. But the net-to-net is new product which we believe from our consumer direct data to be largely incremental consumption, being very, very important in driving overall K-Cup demand. And we expect and anticipate additional opportunities like that.

Bill Chappell - SunTrust

I just remembered one last one. Anyway to track kind of with your new initiatives, the percentage of K-Cups that are non-coffee at this point?

TJ Whalen

As I kind of look backwards here when this system, when the Keurig System first produced only coffee, we saw an opportunity to expand that to tea and that was by and large incremental and now tea represents 8 or 9% of the system volume. As we think about new beverage opportunities, obviously what we're shooting for is new consumption occasions, new needs dates with a length to driving incremental usage.

And what I can say about early efforts here with Café Escapes and Perfect Iced Tea looking at IRI data for just the grocery channel in the holiday period would suggest that about 12% of the K-Cups that consumers bought at grocery were Café Escapes dairy based K-Cups. So we're optimistic about the future and we believe that it can enhance overall system volume.

Operator

Moving on from Dougherty & Co. is Greg McKinley.

Greg McKinley - Dougherty & Co.

Real quickly away from home is the topic, we haven't really talked much about so far but you clearly are experiencing some rebound there. Can you give us a sense for the order of magnitude to which the sort of return of that market is contributing to brewer replacements?

David Manley

I can tell you that we have a bet on whether a Away From Home question comes up and I just wanted to lie hello. In any case I cannot tell you the magnitude of the growth that we had in Away From Home, but I will say it was substantial. In double-digits, very high double-digits, let's just say that. We grew the business despite the fact that we did not see the economy really turnaround, so it's more our efforts that grew the business rather than the economy.

We did a couple of things in the business, the first is we focused on the small office segment, where you may not know but there is about five million offices in United States and about 80% of them are small offices. So really we really tuned up our marketing message for the small office in two ways. First we launched new price points, making us a much more competitive and affordable for people in small offices to get a Keurig brewer. And secondly we took those price points and products and put them of Keurig.com and started selling direct to end user small offices and we saw a really, really strong return there.

Greg McKinley - Dougherty & Co.

Okay.

David Manley

But it wasn't just small office, we also saw a big growth in large offices as we restaged our flagship large office brewer and so we grew there as well. And, I think I'm pleased to say I think the growth will continue in future quarters. If you go to slide 15 in the deck you'll see a brand new brewer we're introducing right now called the B-155 brewer for small and mid-size offices as a lot at neat features. So the story I would say is the economy hasn't rebounded yet but we're growing and if the economy comes around it should be even better.

Greg McKinley - Dougherty & Co.

I know we're not prepared to talk about price points, but you said Cuisinart will be priced sort of positioned at the premium segment. Is that suggesting that that will be priced above some of the mid to higher priced Keurig branded brewers? Or is there going to.

John Whoriskey

Hi Greg.

Greg McKinley - Dougherty & Co.

Hi.

John Whoriskey

This is John Whoriskey. Yes that's correct.

Greg McKinley - Dougherty & Co.

Finally just Fran from sort of a housekeeping standpoint, can you talk a little bit about gross versus net sales in each year to business units. And then maybe finally comment on where we are from an efficiency standpoint. You talked about efficiencies realized with the ramp-up of the new high speed K-Cup lines. Sort of what was achieved there relative to potential of those manufacturing efficiencies?

Frances Rathke

In terms of the house keeping question. Keurig gross sales this quarter was 254.5 million. And then the inter company elimination once again, that you eliminate to royalty income and from the sister company and any sort of brewer sales that were made to Keurig over that will be special coffee business, that was $36.7 million eliminated to get to the $217.8 million.

The Specialty Coffee business unit, which now includes Timothy's gross dollars were hold on I got to add Timothy's here – a minute. That was not $192.9 million, the inter company elimination was 61.3 million to get down to what was it, I think it was 130.

Greg McKinley - Dougherty & Co.

131.

Frances Rathke

There are lot of K-Cups going to Keurig from Specialty Coffee business unit, which kind of may go back to an earlier question that Mark was asking …

Frances Rathke

That goes back to I think he is right, where Mark was asking so.

Greg McKinley - Dougherty & Co.

Yeah.

Frances Rathke

Once again the Specialty Coffee business unit manufactures of K-Cups sells them over to Keurig, Keurig then sells it to the retailer. So all the retail sales are…

Greg McKinley - Dougherty & Co.

Are gone through Keurig.

Frances Rathke

Are book through Keurig division on the net sales number.

Greg McKinley - Dougherty & Co.

Yeah, perfect. And then just little color on the, Oh go ahead…

Frances Rathke

On the efficiency.

Scott McCreary

I will just finish off. Hi, Greg, this is Scott. On the manufacturing efficiencies, this quarter…

Greg McKinley - Dougherty & Co.

Yeah.

Scott McCreary

This quarter was particularly strong, because the sales were strong and we fully utilized our capacity. It did help us gain high efficiencies there. There is benefit with the higher speeds, but then it's also full utilization system. The challenge we have at these growth rates is that we also have to make significant investments in more new lines, hiring more people and that's where we'll make big investments in the back half of this year to be prepared for the continued growth.

Greg McKinley - Dougherty & Co.

Okay. So there'd be some temporary ebb and flow as capacity catches up with demand and vice versa?

Larry Blanford

Yeah. I think that's a good way to look at it. Coming between now and the end of our fiscal year, we anticipate 11 new high-speed packaging lines being purchased and installed and staffed versus the 27 that we have today. So, it's a significant investment and a large number of people that will be coming on Board.

Operator

We have time for one final question coming from Tony Gikas with Piper Jaffray.

Tony Gikas - Piper Jaffray

Taking my question. Maybe could you just update us a little bit on increased distribution opportunities and what's happening at Wal-Mart following the holidays now, do you anticipate getting some more shelf space, rolling out more brewers, and then maybe just a quick update on K-Cup tie ratios?

John Whoriskey

I'll speak to your question regarding Wal-Mart. I would consider it to be a successful holiday season. This is the first Christmas season we've had with Wal-Mart and the business is progressing nicely and we would see certainly some continued expansion opportunities as we start to allow that retailer mature further with our business.

Unidentified Company Representative

Let me also if I might in that first part of your question, have Jim talked about our grocery distribution, which is also I think pertinent to your question and very important one. Jim?

James Travis

The continued growth in grocery now is exceeding 10,000 stores. The universe of grocery as many know is up to 33000 and so we're really expanding fast. I think the evolution of the grocery channel overtime is going to lead us to more of these four-foot sets. Right now we're in about 1500 locations with the four-foot set, so this is going to be an evolution as we continue to grow 12 count K-Cups across the country, as well as just building on what John is doing at Wal-Mart.

Scott McCreary

I think did you ask about tie ratio, did I hear you right? Yeah, just a quick couple of comments on that. That was what I articulated a bit earlier, as we have over a year ago began to rethink our business in terms of increasing our share of household non alcoholic, non carbonated beverage consumption, we really want to try to encourage not only adoption by household, but ideally we would like each household to purchase multiple brewers.

We would like them to have a brewer in their kitchen, we'd like to have them have one in their lower level office, at their vacation home, at their weekend get away, whatever it may be, so that whenever they are in need of a beverage, hot or cold as we expand our line that we are positioned to provide that opportunity. So tie ratio is not particularly important, if the overall demand of K-Cups and we called, we're not really subsidizing the brewer. We sell our At Home Brewers at approximately breakeven, but we're not subsidizing.

That was a very important decision that we made several years ago. So to the extent that the consumer wants multiple brewers that's their money, if we were investing in that brewer, if we were putting it in their home for free, then that tie ratio would become very important, but we're not. So when a consumer buys a brewer that is their capital investment, if you will. So what we're trying to do is expand total consumption and if you want more on that, I'd be happy to address it later, but that's how we're thinking about it.

Tony Gikas - Piper Jaffray

I mean do you have a feel for the number or are we still pretty close to two K-Cups per household per day utilized? I mean is there a – is there better measurable increase or decrease in the last three to six months?

Larry Blanford

No, we do track it and we've not seen any significant movement either way. I think as we've said the Mini, of course, depending on how it's used. If it's used as a primary brewer, it is we're seeing very similar consumption per brewer per day on the Mini. If it's used as a secondary brewer, if it's in that, obviously, we can get away, it's not being used everyday, but fundamentally as brewers are being used as primary brewers, we're not seeing too much change, we're not seeing any change in our data and we'll continue to track it.

Operator

And Ms. Rathke, back to you.

Larry Blanford

This is Larry. It's certainly been a pleasure to talk to you about our past quarter, which was truly outstanding and our plans going forward. Our new reports is, we'll also soon be available to our shareholders and it will be posted on our website at least by Monday and we, certainly, appreciate you interest in our company. We encourage you to read the annual report and certainly our Chairman's letter and my letter, I think you'll find it will give you some helpful insights. Thank you for joining us today.

Operator

And that concludes today's conference call. Thank you for your participation.

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Source: Green Mountain Coffee Roasters, Inc. F1Q10 (12/26/09) Earnings Call
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