Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)
Annual Meeting of Shareholders Conference Call
March 6, 2014 10:00 AM ET
Norman Wesley – Chairman
Sonia Cudd – VP, Associate General Counsel and the Corporate Secretary
Brian Kelley – President and CEO
Good morning. I would like to welcome all of you to the 20th Annual Meeting of Shareholders of Green Mountain Coffee Roasters and like to thank all of you for taking the time today to join us. My name is Norm Wesley and I am the Chairman of the Board of Directors and I will be presiding at this meeting today. It’s now 10 o’clock and I will call this meeting to order.
I am joined this morning by Brian Kelley, the President and CEO; Fran Rathke, who is our Chief Financial Officer and Sonia Cudd, who is Vice President, Associate General Counsel and the Corporate Secretary and she is going to act as a Secretary at this meeting and will record the proceedings.
I am very pleased to be with you again this year. We've had a very exciting year and we believe that with some of the developments that we had this year, a very, very bright future for the company and Brian is really going to come up and talk to you about that a little bit later in the meeting.
The business purpose of the meeting is first of all to elect four Directors to serve for a three year term ending in 2017, to approve on an advisory basis the company’s executive compensation programs, to approve an amendment to the company’s Restated Certificate of Incorporation to change our name to Keurig Green Mountain and to provide the company’s omnibus incentive plan to approve, to approve the company’s 2014 amended and restated employee stock purchase plan and then finally to ratify the appointment of the company’s independent registered public accounting firm for our 2014 fiscal year.
So we’ll first conduct sort of the formal business of the meeting and then I am going to introduce to you the Board of Directors and then Brian is going to come up and he is going to just give you a good update of sort of the company itself and what we are doing and then we’ll have a question-and-answer period and we’ll be prepared to talk to you about anything that you would like to chat about at that point.
And with that Sonia if you please?
Sure. Thank you Mr. Chairman. First, I would like to note that portions of today’s proceedings are being recorded for purposes of the webcast, which is happening live. Recording of the event will also be available on the investor portion of our website following the meeting.
With that said I can report that on December 5, 2013 the Board of Directors of the company fixed January 6, 2014 as the record date for purposes of determining the shareholders of the company entitled to notice out and vote at this meeting. Also on that date the Board appointed Alliance Advisors as our Inspector of Election. A representative of Alliance Advisors is here today and has taken the appropriate oath of office.
I have been advised that the notice of the annual meeting of shareholders, the proxy statement and the form of proxy were made available and were mailed on or about January 24, 2014 to each shareholder of the company as of the record date. I can also report that as of 10 am today more than a majority of the votes entitled to notice of and to vote at this meeting were present in person and by proxy, in fact just about 94%. We have a quorum and the meeting is qualified to proceed.
Thanks, Sonia. So with the quorum present the polls are now open and the businesses of the meeting can proceed. And so I am going to now ask Sonia to present each of the items.
The first item to be presented today is the election of four Directors; John D. Hayes, A.D. David Mackay, Michael J. Mardy, and David E. Moran as Class III Directors to serve a three-year term until the company’s annual meeting of stockholders in 2017.
The second item is to approve on an advisory basis the company’s executive compensation program as more fully presented in this year’s proxy statement. The third item is to approve an amendment to the Restated Certificate of Incorporation to change the company’s name to Keurig Green Mountain Inc.
The fourth item is to approve the company’s 2014 omnibus incentive plan. The fifth item is to approve the company’s 2014 amended and restated employee stock purchase plan and the sixth item is to ratify the appointment of PricewaterhouseCoopers LLP as the company’s independent registered public accounting firm for the company’s 2014 fiscal year. All items are more fully described in our proxy statement.
Thanks, Sonia. All proxies that have been received by management have been delivered to the Inspector of Election. If you have not already turned in your proxy please do so at this time. If you would like to raise your hand, anybody needs to, we’ll pick them up. In addition, if you have not yet voted and you need a ballot you know I would ask you to raise your hand. I am not seeing any, okay, any votes cast at this meeting today will be included in the final tally.
Okay. With all the items now presented, I will ask that if there is any shareholder present who wish to discuss any of these specific items, you're welcome at this point.
Unidentified Corporate Participant
(inaudible) carries very little distance as you go international. So I am trying to think of Green Mountain, as Green Mountain everything up here, I mean the bakeries et cetera. So if you could give us the background of why you didn't need to put coffee in or Vermont in or something?
It's a good question, Dan. Let me address it, and I was going to -- I assume we'd going to addressing here today, so I'll do it now and maybe if is further questions you can ask them. This company has succeeded well because we have been a unique combination of Vermont-based sustainable coffee company with a high-tech Bostonian company. And the combination of that was really important that we not only combined in form and in function which we did as we integrated the two companies. We wanted to make sure the name reflected the strength of both.
The Keurig brand will be the brand that takes us global. The Keurig brand will be the brand that takes us into the categories beyond coffee. So the Keurig brand is critical to the future of the company. It represents more than 90% of the revenue of the company today. Green Mountain is associated with about 20% to 25% of the revenue, I am [bolstered] with those numbers. So it was important that we have both Keurig and Green Mountain. Often people ask why Keurig first? It is for that reason. 90% of the revenue today comes via Keurig through the system.
The other important thing to note is both brands are really strong and important to the company, and so we thought by integrating them, it's a reflection of who we are as a company, it's a reflection of the importance of both brands, it's a reflection of the heritage and the culture we have that's started right here and has built. And so that's why we combined them. Dan your question may even suggest why do we still have Green Mountain and it's because we think it has a lot of -- it has meaning not only to our employee base, it has meaning to our customer base, it has meaning to coffee growers around the world that we deal with in more than 25 countries and as we globalize we think we can globalize the Green Mountain Coffee brand.
So that's why we are using both names and that's we're excited about the combination of Keurig and Green Mountain into one name.
Unidentified Corporate Participant
And I just add the idea, the notion what the expansion into cold, which you're going to hear about, it really gives us something that bridges both hot and cold.
Unidentified Corporate Participant
Yeah, but I didn't notice it this morning.
Okay. If all the shares have been voted on I'll now call in Sonia to report the results of the election.
Mr. Chairman, I can report that the polarity of the votes cast were voted in favor of John D. Hayes, A.D. David Mackay, Michael J. Mardy and David E. Moran and each has been duly elected. I can report that more than a majority of the shares of the common stock present or represented by proxy at this meeting was voted in favor of the company's executive compensation program. I can report that a majority of the shares common stock outstanding as of the close of business of the record date, were voted in favor of the amendment to the company's re-stated Certificate of Incorporation to change the company's name to Keurig Green Mountain, Inc.
I can report that more than a majority of shares of common stock present and represented by proxy at this meeting were voted in favor of the company's 2014 omnibus incentive plan. I can report that more than a majority of the common stock present and represented by proxy at this meeting were voted in the favor of the company's 2014 amended and re-stated employee stock purchase plan. And finally I can report that more than a majority of the shares of common stock presented or represented by proxy at this meeting were voted in favor of ratification of PricewaterhouseCoopers and their appointment have been rectified. The company thanks all of its shareholders for its support in these proposals.
Okay. With that, this really concludes the formal part of the meeting. These are the things which we have to do and so now we're going to be a little bit more informal and just chat with you more about the company.
But before I do that, what I'd like to is, first of all introduce you to Board of Directors that are here today and I'd ask that each stand just briefly so people can see who you are. Start with Barb Carlini, who served as Senior Vice President and Chief Information Officer of Dean Holdings and she has been on our Board since 2002. Jules del Vecchio, retired as the First Vice President of New York Life Insurance Company, been on our Board since 1993. John Hayes is Executive Vice President and Chief Marketing Officer of American Express and has been on our Board since 2013.
Susane Kilsby is the Senior Advisor to Credit Suisse Group, following a career of more than 30 years at Credit Suisse, most of that in Europe and has been on our Board since 2013. David Mackay he's retired Chief Executive Officer and the President of Kellogg Company in January of 2011 and he has been on our Board since 2012. Mike Mardy is Executive President and Chief Financial Officer and Director of Tumi Holdings. He's been on our Board since 2007.
Hinda Miller if you probably all know her better. She is formerly a Vermont State Senator and is Principal and Founder of the Sultana Group and has been on our Board since 1999. Dave Moran is the President of Marketing Driven Solutions. He has been on our Board since 1995 and Rob Steele served as the Vice Chairman of healthcare strategy for The Proctor & Gamble Company and Rob’s been on our board since 2013, so thank you all.
Before I am going to ask Brian to present here his remarks I am going to ask Sonia to read sort of a forward-looking statement as this is a webcast we feel like we need to do this.
Yes and before I do that I have been asked to please ask everyone to turn their phone off. We’re getting some feedback that’s going through to the webcast, so thank you so much.
Certain statements made during the presentation today and the question-and-answer session which follows the presentation may contain statements considered to be forward-looking. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated. The risks are more fully described in the risk factors noted in the company’s most recent filed form 10-K. We invite you to read the full disclosure regarding forward-looking statements contained in our filings with the Securities and Exchange Commission.
From time-to-time the company has information to provide to the public and to you, our shareholders. Often we do that by sending out a press release or posting it to our website.
Good. With that I will ask Brian to come up. He has had an exciting first year. Sort of feels like he has been drinking from a fire hose a bit but he is going to talk to you a little bit about the developments in the company. Brian.
Thank you. Good morning everyone. It has been an exciting year and I want to start actually by just recognizing couple of our partners that are here with us today. We have two of our very good friends who flew in from Italy for our shareholder meeting Emilio and Daniel from our Lavazza partner. Please say hello to everyone. You all will be excited to know that we’ll soon have Lavazza in a K-Cup and you can experience Lavazza in K-Cup in addition to what we already have out there which is our new Rivo machine where Lavazza espresso can be enjoyed right now. So thanks for coming.
We also have Sean Riley, our audit partner from PWC. Sean would you stand up. Thank you, Sean.
We have had a terrific year, an exciting year and we actually think, we are at the very beginning of a major and disruptive change in how the beverage business works and we’ll take you through why we believe that, we’ll take you through some of the insights that we gained, some of the learnings we had and we’ll show you some of the new products that we’ll be launching and I think you will find it fun to see if you haven’t already seen them.
I have a few share slides here. Sonia has gone through this so I will not read this one nor will I read the next one which says that we use both GAAP and non-GAAP numbers in this presentation, so we’ll go through a little above.
Here’s what I am going to do. I am going to take us through who we are as a company because it’s changed; it’s changed and evolved over time appropriately as it needed to. I will talk about our innovation capability which is really the fundamental capability that drives the growth of our company. We’ll talk about the financial performance we had and then we’ll leave plenty of time for any Q&A this group may have.
First, who we are? This is a slide that simply shows for the last 12 months that we’re a big and growing company. $4.5 billion roughly of revenue and we now have more than $1 billion of EBITDA. We’ve been growing revenue at about 12% a year with operating margins of 18%, a dramatic improvement over a year ago. And our return on investing capital continues to improve and is now a healthy 19% and we’re proud of that and it’s important that we watch it.
We also are proud of the fact that we are now offering a dividend. So we have a dividend of 1%. We figured some of you may enjoy that. It's a great way to return some of the cash we are generating to the shareholders, to you. We are often asked and one of the most frequent questions I get asked is who are you as a company, are you a coffee company, are you an appliance company, a technology company, are you a beverage company, exactly what are you? And we often tell people this is what we are, we are a personal beverage system company.
In fact to be more specific we are an innovative, technology-driven, values-based personal beverage system company. And we like to define ourselves that way because it talks about who we are and how we operate. And that's how we think about ourselves as a personal beverage system company and that's how consumers think about us.
But it all started because we were able combine, back in 2006, many of you watched it and saw it and were shareholders when it happened, where we took a sustainable coffee company and a high tech Boston company and we brought them together and it has really made all the difference. And the creativity and innovation we strongly believe comes from the fact that you have common problems that consumers face and you solve them from various vantage points. And when you come at it from technology, you come at it quite differently than you do as a beverage company or as a coffee company.
And so what we created with Keurig is really the combination of this coffee and technology company but it's much more than that, because when you think about what we had at Green Mountain, it started right here down the road, it's a socially responsible and has been for many, many years since its beginning in the early 1980s, a premium coffee, specialty coffees grown around the world.
With our sustainability focus and a focus on enlightened capitalism and an ability to do partnerships that are not just good for Green Mountain but good for others it's a fundamental part of our heritage. And we combined it with a company that was, believe it or not in 2006 a tiny, small $3 million or so revenue company. And what that capability was -- was quite different when you look at what Keurig brought.
It was almost the total opposite of what you might think of when you think of a sustainable coffee company, it's an engineering base and things like fluid dynamics and hydraulics and software engineering, injection dosing, things that we didn't think about in the coffee business but we thought a lot about at Keurig. And bringing those together is what made all of this work so well for the consumer. And when you bring these two together over the last five years or six years it really created this disruptive coffee experience in the home and accelerated the category to the point where our company now represents nearly 30% of the coffee business here in the U.S.
And so it has created significant value not only for the consumers who drink the coffee in their home but for our retail partners, away from home partners or offices that we serve to, our shareholders all the constituents that we serve. And so if you think about if from the numbers standpoint we've now sold more than 20 billion portion packs, we've sold more than 35 million brewers, we've got an 83% brand awareness of the Keurig name, hence one of the name change reasons, it is a very, very strong brand. And it's a brand that consumers are passionate about and you are going to see that in a bit. And we have importantly in the beverage business we have 60% repeat rates. What that means is when a consumer buys one of our coffees 60% of the time they buy it again and then they continue to buy it.
Most beverages operate in the 20% and 30% repeat rates. Because we can control the experience in the home, because we deliver that perfect cup of coffee every time the consumer repeats it and they repeat it every morning and we love it that they do and they repeat it every day and more and more we want them to repeat it throughout the day as we extend the beverages we offer.
So that's the business and we operate on a very, very simple model. We have a mission and that is to create the ultimate beverage experience in every life we touch and we think about it from the source of the coffee and the source of the machine all the way to the consumers home to the cup. And we believe in doing it we can transform the way the world understands business. But our mission is what we focus on every day because our purpose guides us and establishes our values. But our mission is really simple we want a Keurig on every counter. We want a Keurig on every counter and every home, we want it in every office, we want it in every restaurant, we want a Keurig on every counter. Once we get a Keurig on every counter we want a beverage for every taste that can go through those Keurig's and that's the simple strategy of the company when you put it on one page.
Now our values are then what have created the culture we have and what guide us as we move forward. And I will outline the four values because it's very important we talk about them every day, we live them, we try to live them every day. And here they are. I'll say upfront also that I don't believe -- I don't know of another company that could put these four values up and claim them as theirs, and many times values are very common and they are similar across companies. We think these are truly unique and truly capture so now I will take you through them.
First we partner for mutual success. It would be impossible for us to have the Keurig system we have now with 50 brands in it. Many of whom compete with us at Green Mountain every day, but to invite competitors in, to have a system that pleases consumers mean you have to be really good with partners, you have to be really good in creating mutual success with partners, and we know we are in today's world when we are the partner, the competitor, the supplier and the buyer from the same company, which is what we are in many cases today. And so partnering for mutual success means we have a boundary of this approach to how we collaborate internally inside the company and externally.
The second is the really the igniter of growth for the company and that's our passion for innovation. For those who have had the chance to come and see one of our R&D centers either here in Vermont or in Boston, it's unmistakable and undeniable the passion our people have for creating something that consumers cannot live without, and that's what we think about. But we know it takes courage, it takes curiosity, it takes approaching common problems from different vantage points and that's what we do, and that's the second value that we hold dear.
The third one is we play to win. We don't just play, we play to win. It's important that in order to deliver what we need from a business standpoint, from a community standpoint, from our values, we have to set ambitious goals and we have to deliver them, we have to win in the right way. And so it's playing to win and playing to win in the right way. And finally, we know that if we do that well, if we win in the market and continue to win, we can do very good things for our communities, for our employees and for the world in which we collaborate. And so as we think about our countries of supply, our sources of coffee, we have another 40 countries where we are sourcing parts and components for the more than 500 brewer components inside that Keurig brewer.
And so when we think about the communities and the constituents that we deal with every day, we think these four values capture the company well. It is important to know how they came. About seven months ago, about eight months ago, we did a survey among all employees and we asked our associates, what are the values you hold most dear, what are the values that are most important to us, what are the values that should represent us, because as you can imagine, when we combined Keurig and Green Mountain in to one company, Green Mountain has set of 15 values and Keurig another set of nine values.
We couldn't really just combine them and say now we have lots of values, 24 values. We said what really matters and we did a survey among and almost 3,500 of our employees responded and we asked then what was most important and then we took the results and we gave it to a team of 25 employee from around the company and we asked them to capture it, capture what employees told us and this is what they told us. These are the four values that matter and that's why we've chosen these as our values and this is what we will go forward with.
Now I mentioned that we have a supply chain that's global, and it's quite a different supply chain. Obviously we started right here in Vermont and I say it's different because our coffee supply chain tends to source from economically challenged environments in many cases. It's closer to equator where the Arabica coffee is grown, where the large predominance of the Arabica coffee that we use, specialty coffees.
On the brewer side, we actually source from many developed countries. And so this is our brewer sourcing, our beverage sourcing map, if you look at then where offices are today we predominantly operate here in North America, U.S. and Canada. We have a small joint venture in Japan although a great, great majority of our business is here in North America and you will see over the next few years we will change that as we expand globally.
Our business model is simple and it reflects our mission and that is a simple X-Y axis. On the Y axis going up is the number of households, the installed base of brewers, how many brewers we have and households, how many brewers we have in offices and we measure that. And on the X axis, we called it attachment rate. How many pods per day per machine do we brew in that machine. And our business model is really simply and yet it's complex but this is what we focus on every day. How do we climb the number of households and offer more beverages that consumers can use in our machines.
But when you ask a consumer why have you bought a Keurig and why is it one of the most impassioned brand out there today? Consumers name their Keurig brewer, they call us and they write songs about their brewer. It's incredible the relationship our consumers have with their brewer. And they tell us that it's primarily for these five reasons. First and foremost it is simple. Instead of brewing the pot of coffee the old way I can do a single cup and not waste a lot of coffee. I can do it one tenth the time and I don't have any waste and I don't have any mess.
The other thing is they love that they just put a pot in and push a button. It’s simple and it’s intuitive. They love it, it’s less waste. Importantly it’s a freshest perfect taste every time and then one that we have learned these last two are really critical it has vast brand selection. There are many systems out there that only give you the brand of their choice, their company’s brand. We have vast selection of the best coffee brands, certainly in North America. That’s what the consumer will tell you.
And when we dig a little deeper what we actually learned is that it’s one of the rare products that has been designed for the five senses. Every one of the five senses is touched by our product and it’s rare to find that in consumer goods, either in durables or packaged goods because we hit each of the five senses and we do it in a very effective way and the brew, the smell of the coffee, the feel of the machine, the taste of the coffee, the visual signals of the brew itself and the coffee being brewed, the touch of machine, how it feels, the ergonomics of the machine, each of the five senses is touched. And when you bring that together you bring not just a functional benefit, you bring an emotional benefit and we have captured that in one of our recent commercials here.
That’s a new campaign we have Brew the Love because we know consumers don't just love the beverage, they love what it does when they bring it in the home or they bring it in the office. But it’s always about the beverage, it’s always about can you deliver the perfect taste every time. I happen to be drinking here and I don't know if any of you got one when you were back the snap of the new Snapple Ice Tea and this is the Peach Tea.
Actually the Snapple has an ad that's running and it’s going to come out that says that you can’t taste a better Snapple than the one that’s made in Keurig, and that’s what we want. The freshest beverage, we want the freshest of every brand that goes in. We’re creating right in the home, it’s not pre manufactured. The consumer is actually making it in home and that’s what we love about Keurig and that’s what consumers love about Keurig.
But it's so much more than that then when we think about it from a business standpoint because when you have this kind of consumer passion we have learned that it’s done a lot of other things and when we reflect on the success of Keurig we think about five of these things here.
First we know there’s a trend going on around the world and particularly in developed countries where premium experiences are being brought into the home and whether it’s in healthcare or in beauty care or spa experiences or entertainment, music and theatre and movies premium experiences are being brought professionally into the home and we know that Keurig is doing that in beverages. We are able to bring a premium coffee experience, a premium tea experience into the home.
We have a network system effect which I will explain in a slide or two here. We know it’s a brand accelerator. We know that brands grow at a different pace in a different way in the Keurig system than they might on a retail shelf, in a bottle or a can or a can of coffee. The fact that consumers are creating in their home their own beverage empowers them to make choices in a way that they weren’t able to do before.
And finally it gives us an enormous advantage because we now we have roughly 18 million installed homes. We’re going to have the ability over time to be able with the consumer opting in, to be able to watch and see what they brew every day and when they brew it and why they brew it and the difference between a Wednesday and a Saturday and Florida versus Vermont during the summer and the winter and the spring and we often think that the consumer packaged goods industry has long been absent that information. It’s been void of information. And we know that whoever best understands the demand signal in the home will win and we have the real signal in so many homes to be able to begin to understand that dynamic and that data signal.
Now I talked about the powerful portfolio of brands and I will just I will show you what we mean by that. It starts with Keurig and Green Mountain. We added our own brands that we created and we think there will be a couple of these that will be billion dollar brands just like Keurig and Green Mountain are. We created the Donut Shop brand which is an enormous success for us and our system hopefully many of you are drinking Donut Shop. But we've also brought in so many partners, really, really expert partners who have terrific coffee and tea businesses and who have brands that really add credibility and strength to our system. And when a consumer can buy a Keurig and have this kind of choice that's what gives us such an advantage.
So we talked about having a network effect and let me explain what that means. A network effect is -- it starts with Keurig at the center and Keurig becomes a gateway for new brands and new homes. And what we mean by that is as we get more brewers in the home actually more and more brands want to come into our systems and as more brands enter our system, more consumers want to put the brewer in their home. And so it's self-regenerative network effect where the more brands we add the more brewers we get and the more brewers we get, the more brands who want to come in. And we give the consumer ultimate in choice and as extend the coffee and tea and coco on the right hand side of this chart, as you look at it into new beverage categories like we've just announced in cold beverages we believe we can even amplify and accelerate that network effect and so this is how the system works.
And our competitive edge as we look at this combination of packaged good and technology it really rests in five areas that we have this unique combination of beverage and appliance model. And I will just give you an example in the washer and dryer business you have GE and Whirlpool making the appliances and other you have P&G and Unilever making detergents but the innovation is never in sync, it's hard to get in sync, it's in two separate companies. We have the appliance and the packaged good in one company and that leads to the second advantage which is an innovative holistic system design.
We don't just design the appliance, we design the product that goes in the appliance, we design the beverage in the pot, we design the lines that make the pod that they go into the beverage and that go into the machine. So we have a system design component element to our company that is very unique and is a true competitive advantage.
We are multi-branded I mentioned that. We have valuable and very smart real-estate in the counter top either at homes and offices and we have this ongoing capability to build mutually beneficial partnerships which is the core of our business when brand choice is so important.
Now it only works if you are able to be the best in the world at something. If you can really create something that the consumer says I can't live without this every morning and that's what our innovation capability does. And we have innovation both in Austin and here in Vermont on the beverage side and the technology side that may surprise you. In fact it surprises virtually everyone who comes to see it because we would put our technology up against virtually anyone in the world in terms of the ability to understand the beverages, understanding the impact of beverages in the home and understanding how this technology works. So when you bring innovation around you have to make sure that you can design all of these in a system and we will show you a little bit about how we do that.
We think it's very important that we're designing each of them and responsible for the interaction of each of them and we don't design them like many companies do in a one-off company and then you throw it over to another company who adds some value and you throw it to another company, we do it all at once. And so we've this inner client capability to make a system and that's why we think about ourselves as a beverage system.
But to bring this to life we thought we would show you a video that reflects the strength here in Vermont and the strength in Massachusetts of the capability that's going on not 50 miles from here.
Good. That's the company, and when you have people like this collaborating, literally most of this was shot right down at our Waterbury Center facility, where we have PhDs from around the world working to delivering these beverages and in combination with our team in Boston working to create machines that can brew these beverages perfectly. That's what gives us the kind of innovation I am about to talk about.
And so I'm going to talk about our two big innovations that we will be launching over the next 12 to 18 months and that is Keurig 2.0 and our Keurig Cold. And so I'll go into a little more depth on each of them and we are very, very excited about our ability to continue to grow the business with these innovations.
First Keurig Cold 2.0; when we look at what is it we're delivering fundamentally it's the first Keurig ever that will brew either a single cup or a carafe of coffee a full carafe of coffee. It offers every one of the 50 plus Keurig brands that are in system today, all of them will be with us. It brews every one of the Keurig cups. It brews the K-Cup, it brews a -- what we call U-Cups today and it will brew new kinds of cups that we put out, cape carafe, just the carafe cups and you will see overtime K-Mugs that are actually size of a mug, but one brewer can brew all of these. It can take K-Cup and take all the new pods as well for the hot system.
And we've shown it to our retailers and retailers are very, very excited about what this can do to extend the business and I'll show you why we're exacted too but importantly it uses the proprietary technology that can identify and perfectly brew each pod that you put in and it needs to be identify that pod and we will show you why and it can identify the pod and then open up the software requirement for the machine to be able to brew the pod and customize the pod to your choice.
It's going to be a nearly identical price points to what Keurig offers at today and it will be available at all current Keurig retailers that sell Keurig and it in essence it will replace the line. Over the next 12 to 18 months from launch it will place the Keurig line and it will give everything that current Keurig does plus it will brew new sizes all the way of carafe of coffee for the same price. And so we think it's a terrific launch and we know what consumers have told us. In fact this is what they've told us.
About 80% of the population still hasn't tried a Keurig brewer. In fact, only about 13% or 14% of the households today own a Keurig, and so when you go to a Stop-and-Shop or Shaw's or a Culver if 100 consumers walk in there only 13 of them own Keurig today, and that's obviously our goal is to change that. Now many of those consumers who walk-in own a pot of coffee that you see on the right hand part of the slide. They are coffee maker, traditional coffee maker that delivers larger volumes, delivers multiple servings and it’s fairly inexpensive. You can get one of these for $19 or $29.
And when we launched Keurig it became a hit instantly because it delivered a perfect single cup and it did at all the things that we mentioned convenience and no mess. But what consumers say is that it doesn’t do everything I need that, that part of coffee does. In fact what they tell us is can you make two in one. Can you make your Keurig do what a pot of coffee can do for me? When my old traditional coffee maker can make a pot, can you make one that does both, and we did and that’s what 2.0 is.
We are able to have a single cup system that also brews a carafe of coffee and so we have the ability to read the cup, put a cup in, the machine will read it and then brew a carafe of coffee that’s what consumer wants it will brew a single cup of coffee if that’s what consumer wants. And you can see that at the bottom small we have different size of the cups and type of cups for different types of brew. And that’s what we’ll be launching and what we found is that this is exactly what the consumer has asked us for.
So to give you a sense if you think of today and you think of the 20% that’s highlighted here, that’s 20% of the households that use Keurig or have used Keurig in last few years but 80% are still not using our Keurig single cup system. And when you ask them what is the single biggest reason why you are not, the single number one functional reason they tell us is it doesn’t brew a pot of coffee. It only does a single cup for us. And when we ask them why have you not bought yet a Keurig, they say because it doesn’t brew a pot, doesn’t give us the larger sizes we need.
So that gave us a pretty good indication of what the consumer wanted and then we talked to current Keurig owners and we asked the current we owners why do you still have a drip coffee maker in your home? Why do you still use drip coffee maker? And they tell us, 72% of them say because there are still times when I have people over or I have my whole family is here on Saturday morning and I need to brew a pot of coffee. I start to pull this traditional coffee maker out and I have to make it that way, can’t you do something I could make it with my current Keurig and so that’s what two points was. And so we have given now the ability to make it all in one machine; a K-cup pack, a mug pack, K-carafe although up in line where you can make a full set of solutions.
Now with that comes the need to be interactive and to be able to the ability to read a pod. And so the way that’s worked is we put the pot in, we have a very special and proprietary capability on that pod on the lid itself that the machine is able to read and then it brews exactly to what that pod needs. Now it’s important to do it because the benefit to the consumer is that when the carafe cup goes in it will only let them brew the sizes that fit a carafe and it’s really important that when an 8-ounce cup goes under the dispenser that it doesn’t brew 32 ounces of coffee at a 190 degree which we certainly don't want in our kitchen or on our counters. And so we have to have the ability to be able to read the cup and to and able to deliver exactly what the consumer wants and that’s what K2.0 is that’s what our Keurig 2.0 machine does.
And so that proprietary technology is clever. It is patented by our partner. One of our partners it is protected and it’s actually the very same technology they choose in anti-counter fitting of currencies around the world and it’s a very proprietary technology that we know then is terrific for us and can deliver the benefit that we need for our consumers. So it’s the first brewer to brew a single cup and a carafe and here’s a little video that will show you how.
So what I’ll do is bring about the moments that you saw here where people want to bring friends and family in to the home and share a cup of coffee and do it very quickly and give them the choice that they want and so that’s Keurig 2.0.
Now we have recently made a couple of large announcements one of which that we are going to introduce a cold machine in addition to our hot machine and so I thought we’d take you through what the cold machine actually is and how it works and a little bit about what it will do. So Keurig Cold it came from the consumer. The consumer who owned Keurig we asked them, constantly we asking them what do you want us to do next. What's your Keurig do next? And they all said, what we want is, we want to put a pod in, push a button and we want to get any drink we want. We want to get cold drinks, we want to get hot drinks, we want to get any brand we want. Keurig's trained us that we can get all kind of coffee brands can you do the other brands as well?
And so we said if we are going to be able to do this, we need to solve basically five technical areas, and this is where innovation kicked in and it kicked right here in Vermont and it kicked in, in Boston and I want to take you through the five technical challenges we had before we could convince ourselves and convince consumers that we have something that was worth launching and we could be very excited about and be truly disruptive with.
First is consumer source that needed to be able to serve cold. It's a cold machine I don't want to have to put ice in it, I want it to be cold, I want to come out cold and let me chose if I put ice in it. Now it's not simple to make something cold. Big refrigerators use compressors, very large compressors to make things cold. We couldn't do that. We have to do it in a much more sustainable way and smaller way.
Next things is that it had to be able to carbonate because they want carbonated soft drinks. They want other carbonated seltzers and spritzers and they want the ability to carbonate certain drinks, and we have to do it and we thought when we listened to consumers they didn't want a CO2 tank. With some of the products out there today you have to snap-in or screw-in a CO2 canister and that CO2 canister now cannot be disposed of in a normal way, it has to be recycled and sent and taken back to the store because it actually considered a hazardous material that needs to be recycled like your grill tank or any other kind of propane tank that you have.
So consumers don't like the idea they have to bring it back to the store in order to get it recycled. So we had to carbonate without a CO2 tank and that required very, very unique invention and we were able to do that.
The third thing is it had to deliver precise flavor and precise carbonation levels. Carbonated drinks are different, Perrier is different from Coca-Cola which is different from Dr. Pepper which is different from a Fanta. They have different level of carbonation and certainly have precise formula to syrup that you need to be able to deliver and so you couldn't leave it up to the consumer to put in as much syrup as they want or as much carbonation or a little carbonation as they wanted. Big brands want their beverages to come out perfectly when the consumer consumers them in a bottle or in this machine. So that was third thing that we need to solve.
The fourth is we had to have what Keurig consumers have come to expect, brand variety. They want the brands that they love. They expect the consumer brands that they are drinking today and they want them in this machine. And finally it had to be put in a footprint that makes sense for the home, just like a Keurig machine had to have the size and the price ranges that made sense for this Keurig machine and when we are able to deliver those we decided to announce and announced the launch of Keurig Cold, and it will do all five things that we have announced.
It will freshly prepare carbonated, sparkling and non-carbonated still beverages. So everything from colas and flavored soft drinks to filtered waters, ice teas, juice drinks, sports drinks, energy drinks whatever it is that the consumer wants, we are able to put in this cold machine. They wanted one-touch simplicity. They want to put a pod in and push a button to get the drink. It will actually ensure that we consistently deliver the taste of that beverage every time just like we do with coffee. It will launch in our fiscal 2015.
Again it will be multi-branded open architecture platform where it is -- we welcome other brands in into our system so that the consumer has broad choice. And then many of you saw we announced a strategic partner early on here with Coca-Cola to be our partner in development and the globalization of this system. And so we are very excited about what we're doing with 2.0. We are very excited about what we are doing with Keurig Cold. The power and the strength it gives us in consumer homes, in retailers and with our partners gets improved an accelerated at a rate that we haven't expected actually. And so we are now in the process of developing and executing both of them for preparation of launch.
So that's a little bit about the two biggest innovations we have coming and we are very excited about those. And we want to wrap up by just say all of this has led to and we think the future will be driven by the innovation we have the common innovation that we made, so if you look at our sales growth that you see on slide here, we had a CAGR of 55% over the last five years. We have had very, very strong improvements in gross margins. If you look at our gross margin just in 2012 and 2013, and we grew it more than four points 400 basis points from 32 points or 33.2 points to 37.2% gross margins.
If you look at the productivity that we continue to deliver and it's important that we do as we get large we have to also be efficient and effective and so we've announced that we will deliver a $100 million by the end of 2015 and we are on track to do that. And it mostly comes from the procurement area and the manufacturing and logistics areas. It has generated for us very strong operating margins and we compare them favorably very favorably to other CPG companies and certainly to appliance companies when we look at these operating margins we've gone from 10 points to 18.7 points over the last five years which is a strong operating margin improvement. And we think we can stay in the high teens and begin to get to 20 over the long-term which is very, very powerful and strong operating margins for the company.
And if you look at our EPS growth we've had a five year CAGR then of 74%. If you take that and you say GAAP EPS growth it's actually 76%. And we've allocated and used our capital wisely and we will continue to. It's important that we are focused on not only the returning cash to shareholders but putting cash where it's best used and where it's historically been best used is reinvesting into the business to create innovations like that we've just showed you. And so we're doing both, we're returning cash to shareholders, we're investing in the future of the business, we're investing in plants and equipment to make sure we can keep with building the pods that we sell each year. And as we launch Cold we are now in a new cycle where we will continue to invest in Cold. Like we invested a large amount in the hot system overtime we will also invest in the cold system overtime.
What that has led to then is if you look at our capital investment we've historically spent we think we can be in the 4% to 6% of revenue on a stable basis on a maintenance basis. And then as launch big items that will capital expand appropriately as we invest in what we see as big future opportunities for us like Keurig 2.0 and Cold Beverages.
What it's generated for us and is very strong free cash flow in 2013 we delivered a record free cash flow for the company of $600 million. We will now invest heavily in Cold until you see that come down a little bit $200 million to $300 million but we generate free cash and we know we can continue to do that on a sustainable basis. And ultimately what this is then yields continual improvement on our returns on capital where the capital that we put in on your behalf and all our shareholders behalf we get strong returns on that capital. And so we think that's the trick to continuing to drive innovation which yields strong financial returns for the company.
Many ask about the Coca-Cola relationship and so I thought we would talk a little bit about that. We actually struck two parts and pieces of this relationship. One is a commercial agreement where we have the ability to put the Coca-Cola brand into our Cold machine, in many countries around the world as we work through it's a 10 year global partnership. To give you a sense Coke operates in more than 200 countries around the world and so it gives us the real opportunity to pick and choose how we want to globalize and the speed at which we want to globalize.
With that also was an equity agreement that Coke agreed to buy about 10% of the company. And in buying 10% of the company we felt that aligned our interest quite well. And so we are excited to have Coca-Cola as a partner certainly as we launch into cold beverages and we are excited about the future.
We've mentioned it will be a multi brand system. We will have multiple partners, we will have multiple brands just like we do in hot and Coke has kind of that first maneuver advantage as they came into the system and it's appropriate given that the size and they are the largest beverage company in the world and we are very, very excited about that.
I will end by just talking about the balance sheet. You can see here on the balance sheet we have virtually no debt -- net debt, we are actually in a net cash position. Our cash exceeds the debt we have in the company. And with EBITDA over the last 12 months again exceeds a $1 billion if you look at our ratios down at the bottom you could see a very, very strong balance sheet. And we announced and mentioned earlier a dividend and so we announced a $1 per share dividend which is we put about 1 percentage slightly lower than that today as the stock prices climbed but we're excited about the dividend and we think it's a start of something we will obviously sustain.
And then finally if you look at our stock performance. The marketplace has rewarded the performance of the company. If you look at year-to-date the stock is up 54%, if you look at the three year return of a 151% or if you look at the five year return. It's pretty clear that we've outperformed the index's no matter how we look at it. But the key is continuing this with powerful innovation and continuing to deliver the results that you have seen in the past. And we think the future is even brighter than our past if we continue to innovate.
It's all about sustainability, it's about doing it the sustainable way, it's about delivering sustainable results from a business standpoint that's got to be the start and that's where we focus. And when we do that we can sustainably deliver thriving communities, our employee base, we can have a resilient supply chain that allows our farmers and our growers and our component manufacturers and suppliers around the world to have a resilient supply chain and then deliver sustainable products.
And I am just going to lay out what we are launching here as a new set of 2020 sustainability targets and I won't go through them in depth you will be able to read them in our new sustainability report that's coming out. And you will see that we are focused on not just what we do well and we do some things very well, we are actually very focused on what we don't do well. We know that we are very good in terms of sustainability of the coffee growers but we've a lot of work to do in terms of sustainability from a waste standpoint, from a recycling standpoint, from an energy use standpoint.
We're strong and very powerful in terms of water use and we will continue to emphasize those but we've laid out 2020 targets that I encourage all of you to read in our sustainability report.
So that's the overview of the company. Hopefully it was a thorough as thorough as we have time for. And now we would like it to open up to questions.
[No formal Q&A for this event]
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