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

F4Q 2011 Earnings Call

November 09, 2011 6:00 PM ET

Executives

John Whoriskey – VP and GM of Keurig’s At Home Division

Suzanne DuLong – VP, IR and Corporate Communication

R. Scott McCreary – President, SCBU

T.J. Whalen – VP of Marketing

Michelle Stacy – President, Keurig

Frances Rathke – CFO

Larry Blanford – President and CEO

Analysts

Scott Van Winkle – Canaccord Genuity

Mitch Pinheiro – Janney Capital Markets

Akshay Jagdale – KeyBanc Capital Markets

Mark Astrachan – Stifel Nicolaus

William Chappell – SunTrust Robinson Humphrey

Alton Stump – Longbow Research

Anton Brenner – Roth Capital Partners

Gregory McKinley – Dougherty & Co.

Bryan Spillane – Bank of America Merrill Lynch

Jon Andersen – William W. Blair & Co.

Operator

Good afternoon, everyone and welcome to the Green Mountain Coffee Roasters, Inc. Fiscal 2011 Fourth Quarter Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to the company's Vice President of Investor Relations and Corporate Communications, Suzanne DuLong. Suzanne, please go ahead.

Suzanne DuLong

Thank you, Telary and welcome everyone. Today's press release is available on our website at www.gmcr.com. Consistent with past quarters, our prepared remarks have been furnished in a Form 8-K filed with the SEC and will not be read on today's call.

On today's call, our President and CEO, Larry Blanford will provide some introductory remarks reviewing the quarter's results in our business. Following Larry's remarks we'll open up the call to questions from the sell-side analysts.

Several members of our management team are with us today for the Q&A session, including Fran Rathke, our CFO; Michelle Stacy, President of the Keurig Business Unit; Scott McCreary, President of the Specialty Coffee Business Unit; T.J. Whalen, our Vice President of Marketing for the Specialty Coffee Business Unit; and John Whoriskey, our General Manager of the Keurig At Home Division.

To ensure we have the opportunity to address everyone's question during the call, we ask that the sell-sider's limit themselves to one question. We will revisit the queue for follow-up questions.

Finally, I'll remind everyone that certain statements will be made today which are forward-looking within the 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'.

Now, I'll turn the call over to our President and CEO, Larry Blanford.

Larry Blanford

Thanks, Suzanne, and hello everyone. We appreciate you joining the call today. Before I begin my remarks I just want to take a moment to thank all of you out there that have supported us over time and especially over the last several weeks. Your support has been gratifying and all of us at GMCR thank you. This is great company. We have a tremendous opportunity ahead of us and we will continue to direct our business smartly and with the highest level of professionalism and integrity.

Now, on to my remarks. I'll speak to our fiscal fourth quarter and full year results, business trends and then I'll discuss our value drivers enabling initiatives. I'll remind you that we've provided additional commentary in our prepared remarks filed in a Form 8-K and posted to the Investor Relations Event Page of our website.

First, on our fourth quarter results. We continued to see robust consumer adoption of the Keurig Single-Cup Brewing system. Revenue in Q4 was strong, with a 91% revenue growth over the same period in fiscal 2010. We continued to drive operating profit improvement increasing our non-GAAP operating margin to 17% from 14% in the same quarter last year and our non-GAAP net income increase 42 million or 126% over the fourth quarter of fiscal 2010, resulting in a non-GAAP EPS of $0.47.

Our fourth quarter revenue was off our estimates. We believe this resulted from a number of factors, including changes in wholesale customer ordering patterns in our grocery and club channels. We saw strong increases in orders from certain customers and those channels during our fiscal third quarter followed by declines in their ordering patterns in our fiscal fourth quarter.

However, IRI's point-of-sale data for grocery and customer provided point-of-sale data for clubs show a consistent level of year-over-year consumer portion pack demand growth over the same time period. For example, based on IRI data on sales through the grocery channel, each of the four week periods in our fiscal second half delivered between 135% and 161% year-over-year unit sales growth.

The consistency shown by the consumer demand data leads us to believe that the variability in customer order patterns was not driven by consumer purchases.

Moving on to brewers, we saw steady demand in the fiscal fourth quarter with brewer and accessories revenue up roughly 40% from the same period a year ago, despite some indications of declines in consumer confidence in light of the broader economic concerns.

According to NPD Group in our fourth quarter of fiscal 2011, Keurig-branded brewers without third-party brewers remained the number one dollar share leader in the U.S. coffeemaker category, with the top four selling brewer models by dollar share. NPD further estimates that among the retailers reporting sales to NPD, Keurig unit sales were up 56% during the fourth quarter from the year ago period.

Quickly recapping our fiscal year 2011, we are most pleased to have delivered 95% revenue growth, 148% non-GAAP operating income improvement and 135% non-GAAP net income growth.

Our earnings growth has enabled us to increase the resources we're able to direct to social and environmental initiatives under our banner of Brewing A Better World. We estimate that total resources allocated to sustainability programs will total approximately $15.2 million for fiscal 2011 or approximately 5% of our pre-tax earnings. In addition, in fiscal 2011 we advanced the business with the acquisition of Van Houtte in December and later announced new partnerships with Dunkin’ brands, Starbucks and ConAgra.

We have continued to expand production with higher output K-Cup portion pack lines and new packaging lines designed for the advanced K-Cup portion pack which is used for our Brewed Over Ice Beverages, Barista Prima Coffeehouse and Starbucks. We've also expanded our supply chain to support the growth of Cafe Escapes and Green Mountain Naturals Hot Apple Cider.

Looking forward, we see continued evidence of strong consumer demand for the Keurig system. We estimate there are Keurig Brewers in roughly 7 million to 9 million households. While we have never projected how many households could ultimately adopt Keurig brewing technology, in light of our most recent quarterly NPD unit share of 17.6% and the unit share growth of 56% quarter over the same quarter prior year, we believe, we have significant opportunity to continue to increase adoption throughout North America. In fact we believe we've seen evidence of consumer excitement and indications of holiday demand in NPD’s September 2011 report, where Keurig Single-Cup Brewer unit sales increased 73% over the same period last year.

In addition, retailers are telling us that while they remain cautious about consumer sentiment overall, they are very enthusiastic about growing awareness of the Keurig system as we head into holiday and fiscal 2012. In fact, many retailers are supporting the system with expanded merchandising, circular advertising and in-store demonstrations. While we too are watchful of consumer spending going into the holidays, we remain confident in the Company's growth potential and are comfortable reaffirming our estimates for total fiscal year 2012 non-GAAP earnings per share in a range of $2.55 to $2.65.

Turning to our business value drivers which are detailed in our published prepared remarks, there are three items I want to address directly in my comments today; first on our efforts to scale to meet demand. As we noted last quarter, an important driver behind our anticipated 2012 capital expenditures is the fact that since last year, we've increased our internal estimate about the size of our brewer sales opportunity for a number of reasons, including the brewer installed base growth we experienced in fiscal 2011. Brewers beget brewers.

The addition of well-regarded brands like Folger’s, Dunkin' Donuts and Starbucks and our marketing support of the Keurig Single-Cup Brewing system and enhanced awareness through expanded distribution and our own brand support. As a result, we continue to execute our plans to support a rising installed base of brewers with additional plant and capacity for K-Cup portion pack production. We are expanding at several of our existing sites, including 400,000 square feet of production capacity in Vermont; 100,000 square feet in Montreal and late October, we announced our intent to establish a new 330,000 square foot production facility in Isle of Wight County, Virginia.

As we refined our forecast and capacity needs, we've been able to refine our expected 2012 capital expenditures. For fiscal 2012, we currently expect to invest between $630 million and $700 million in capital to support the Company's future growth. We expect to spend approximately 80% of this in new capacity. Details of our planned 2012 capital expenditures are detailed in our press release.

As has been the case for the last several years, we believe this CapEx is necessary to enable us to meet forecasted portion pack demand for 2012 and to be ready for 2013. With respect to our value driver of multi-channel distribution, as we continue to expand availability in North America, we also are continually innovating and introducing new products with our various channel customers.

We're also expanding our presence on the shelves. For instance, according to IRI, in our fiscal fourth quarter the average number of K-Cups portion pack items carried in grocery locations approximately doubled over a year ago and this does not include incremental Starbucks items showing up on the shelf this month.

Finally, on increasing the opportunities for portion pack consumption, we mentioned last quarter that a constant focus for us is ongoing innovation in our portion pack product portfolio and we are excited about new products in the pipeline. Our goal with new beverages is to further delight consumers and in doing so increase the opportunity for consumers to use their Keurig brewers.

This brings us to the topic of consumption trends, a subject that frequently comes up in our discussion with investors. Consumption is an important metric in our demand forecasting which attempts to project portion pack sold through retail channels versus traditional Away From Home Channels. Because of the number of assumptions that have to be made, including those around the installed brewer base, office versus At Home consumption, the timing of sales to customers versus brewer adoption by consumers, consumption differences by brewer model, we do extensive consumer research to validate key variables.

For example, there were 17,000 quantitative consumer research surveys conducted by independent researchers on our behalf between April and September 2011. That checking our model with fiscal 2011 actual results confirms our assumptions that consumption trends remained steady at about two portion packs per day for At Home reservoir brewer models.

While we use these consumption trends as well as many other assumptions to forecast demand over the next 12 months, we caution that longer-term consumption data could be higher or lower, depending on consumer demographics and behavior as well as our success in introducing new beverages.

Touching on enabling initiatives, which are those efforts designed to facilitate growth in the years to come and designed to enhance consumer interest and choice, I’m pleased to report that our relationships with Dunkin' Brands, Starbucks and ConAgra continue to move forward smoothly as GMCR hit its marks on committed production quantities of these products.

Dunkin' Donuts and Swiss Miss branded portion packs debuted in August and as you likely saw last week, Starbucks products hit shelves at grocery, mass, club, department store and specialty retail. According to Dunkin's most recent earnings release conference call, consumer response to Dunkin’ K-Cup packs has been very positive with solid sales and consumers indicating they are pleased with the products quality and taste. We're confident that we'll see similar enthusiastic response to the Starbucks launch. Executing these launches successfully required coordinated efforts across the organization and I applaud the teams and all the work that made this execution possible.

In addition to expanding consumer choice in the system, we believe our relationships with the well-known brands fuel new excitement for current Keurig owners and users, great system awareness and of course attract new consumers to the system. The rollout of these new brands into our system has been planned and executed in a thoughtful and deliberate manner and is factored into our 2012 guidance.

As we said previously, while we do not expect to disclose the financial terms associated with these relationships, we are confident that within our business model, which includes 25 owned and non-owned brands sold in K-Cup portion packs and sold through more than 35,000 locations, we have opportunities and flexibility to manage volume and profit smartly.

Finally, continued innovation is a key contributor to our enabling initiative. As we've discussed previously, in addition to our work with Lavazza to develop a new espresso base system, we also have a new Keurig filtered coffee brewing platform in development. Our new Keurig platform remains in consumer test currently and we are looking forward to being more specific about plans for 2012 launch soon.

In closing, I'd like to say a few words about GMCR and who we are. Those who know this Company and the individuals that come together to make our success possible; know how much we value integrity and respect. Though disappointing, we take the recent allegations of misconduct seriously. Our audit committee has reviewed the allegations and we are confident there is no misconduct. There is no wrongdoing. We understand that with success comes scrutiny and at times, skepticism. Ultimately, our best response is continuing to run our business with the utmost of integrity, focusing on driving a sustainable and successful business model.

The Keurig Single-Cup Brewing system is changing the way North America brews and enjoys coffee and other beverages at home and in the workplace. Supporting and enabling the growth potential we see for the Company and the Keurig brewing system remains our most significant challenge and our focus. I thank our employees, our business partners and our extended supply chain for making our success possible, and I thank our shareholders for their belief in our ability to execute on the opportunity we see ahead for our Company.

We have just completed celebration of the 30th year of our Company's founding, which afforded us time to reflect on our culture, which recognizes the powerful synergy of achieving financial results, developing our people and focusing on the sustainability of our customer and supply chain relationships, communities where we operate and the environment.

I am confident that our growing 5,600 plus employee organization understands this synergy, appreciates our balanced approach and is more energized than ever to keep developing great products and building a great company.

Operator, we will now take questions from the sell-side analysts. As Susan stated in the introduction, we ask that you limit yourself to one question. We will revisit the queue for follow-up questions. Operator, will you open the question queue please?

Question-and-Answer Session

Operator

Yes, thank you. (Operator instructions). We’ll take our first question from Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle – Canaccord Genuity

Thanks. So, first question, Larry you talked about K-Cup shipments and the ordering rates at club and grocery. That just seems pretty logical that there was some buy ahead of the price increase. How do you explain the disparity between the NPD data on brewer shipments and the year-over-year that you reported on brewer shipments? Why did it trail what the third party data indicated?

Larry Blanford

Well, on the brewer shipments, I think as we've said before, Scott, that wholesale shipments that we report can be different than the consumer sell-through of brewers and/or portion packs for the matter. So, from quarter-to-quarter for a host of reasons, demand from customers may vary and what is really important and more important than our wholesale shipments quarter-to-quarter is how that product, be it brewers or portion packs, are moving through to the consumer. And that's really what we need to keep our eye on relative to feeling confident about our business moving forward. So, I don't know that I can explain exactly in the quarter, but that variation happens. John Whoriskey, do you have any comments to help?

John Whoriskey

Yeah. Hi, Scott. This is John Whoriskey. I would also point out that if you look at our September results in NPD, our unit sales were up 73% in the month and as we head into the month and into the holiday season, we are positioned probably the best we ever have been in terms of inventory at retail in advance of the holiday season. So I think we're well stocked at this point for what we expect to be a very strong holiday season. So ultimately it's really about our POS trends in our NPD data and shipments come in advance of that, and timing of when the retailer takes product is really a question of how quickly they can move in out of their own distribution facilities. So…

Scott Van Winkle – Canaccord Genuity

Thanks, John. I’ll get back in the queue.

Operator

And we’ll move on to take our next question from Mitch Pinheiro with Janney Capital Markets.

Mitch Pinheiro – Janney Capital Markets

Hello there. Good afternoon. So just in terms of can you give us some estimate as to where your K-Cup capacity is today and where the spending on your current K-Cup platform – where that takes you this time next year?

Larry Blanford

Mitch, this is Larry. I'll start, somebody may want to jump in and help here. So, first of all, we don't report our specific capacity. What we feel confident about is that within the estimates that we have provided that the capacity that we have been putting in place in fiscal '11 and what we are planning to put in place in fiscal '12 will support our demand projections for '12 and importantly, get us ready for holiday '12 or the first quarter of fiscal '13, as we still have a lot of initiatives that we're working on that we would expect to continue to increase demand in '13. So, we're in good shape. I think Scott McCreary and his team have done a nice job. Scott, you might just want to quickly comment on how you're using your engineering teams both for efficiencies and new launch?

Scott McCreary

Yeah. Thanks, Larry. This is Scott. In addition to the new equipment that we are putting in, we have dedicated a team of engineers across all of our sites to focus on bringing the productivity of our current installed base, so that we continue to leverage the investments that we've been making. So we're seeing nice improvements overall in the output from each of those lines and as Larry said, we recognize the holiday season is very important to our business. So much or most of the 2012 capacity is already installed or is just being installed right now and then the capital that we expect to continue to spend this year will prepare us for fall of 2013.

Larry Blanford

And then Mitch, just following-up, you also asked about our next generation and we have provided that capital in that we've spent in '11 and we're planning to spend in '12 and we're spending it and we have lines that are in shake down. We’re running for product samples to support our consumer testing and we're getting closer to or being able to talk about the launch of that product, as I mentioned in my comments. And that is one that we are very excited about and we’re building capacity for that somewhat separately from our base business as we launch that new product and are not quite certain what to expect as we launch it. But we’re very excited about it.

Mitch Pinheiro – Janney Capital Markets

This is a related follow-up. When you listen to Starbucks talk about that obviously you have capacity constraints and I wonder, was any of maybe the K-Cup or lack thereof growth coming from any capacity constraints where you weren’t able to meet certain orders for K-Cups?

Larry Blanford

Mitch, this is Larry. No, that really wasn’t the case. It was as we tried to describe. I will say separately, the Starbucks rollout is going very well and I am very proud of the organization hitting all of its marks in terms of being in a position to support Dunkin' and Swiss Miss and Starbucks, and we wish we could roll Starbucks even faster, but indeed there is a schedule of events and we're on target with those and we’ll be rolling Starbucks continually out through additional channels over fiscal '12.

Mitch Pinheiro – Janney Capital Markets

Did Starbucks ship in this quarter?

Frances Rathke

Mitch, this is Fran. Starbucks, they launched on November 1st, and there was very minimal sales to Starbucks in our fiscal fourth quarter. The majority of it was shipped to them in October.

Mitch Pinheiro – Janney Capital Markets

Thank you.

Operator

And next we’ll move to Akshay Jagdale with KeyBanc Capital Markets.

Akshay Jagdale – KeyBanc Capital Markets

Thank you. Thanks for taking the question. My first one is just a follow up on the CapEx question. I mean, I understand that for competitive reasons you don't want to be too specific, but can you at least let us know how you've changed your capacity planning? It seems like you are being pretty explicit that now the capacity expansion goes through fiscal '13. So can you just first tell me how that's changed maybe in the sense that before it was one year out, now it's two years and then more importantly, will your CapEx come down in your estimation as you see here today in fiscal '13?

Larry Blanford

Akshay, this is Larry. I'll start, maybe Fran may want to kick in here. So, we are seeing that in fiscal '12 we will spend capital to both support our needs in '12 and to make sure that we’re ready for the beginning of fiscal '13. We are not suggesting that we will be spending in '12 all the capital to take care of all of the demand in '13. I would expect that we would continue to grow capacity as we move into fiscal '13. We have not yet formalized our projections for '13. So I would hesitate to give you a sense of what we think our capital spending will be for '13. The other thing, of course also that will be important element of the mix is the introduction of our next generation system and how we envision that rolling out and what the mix between both the next generation system and our current system is going to be. So we're working through a lot of that as we speak.

Frances Rathke

Akshay, this is Fran. I just wanted to comment. In terms of our guidance for CapEx for fiscal '12 of $630 million to $700 million, this is a refinement of the estimates we provided last quarter. As you know, we actually closed down one of the sites, Virginia. So, we have now more up-to-date information. So we have been refining our estimates. So we really haven't changed anything relative to our capacity or projections.

Akshay Jagdale – KeyBanc Capital Markets

And just because this is such an important topic, are you willing to at least say directionally how much you're increasing your K-Cup capacity? On my numbers, I see your capacity closer to 15 billion K-Cups with this capital expenditure plan. Would I at least be in the ballpark there?

Frances Rathke

I would say that that’s high. I think what we're thinking is we're going to have continued strong demand as we head into '13 that we need to meet. In order to have the confidence that we can manufacture and supply to all of our customers at the beginning of 2013, we need to order and pay and spend for that CapEx in essentially nine months out or nine months earlier. So that's why '12 – so much of the CapEx for '12 is really beating into the projection for the estimated total K-Cup demand for '13.

Akshay Jagdale – KeyBanc Capital Markets

And just one last one on, just on the quarter sales on brewers. It looks like your stock is trading down significantly post market here. Can you give us a little bit more comfort about your sales guidance for next year, especially on brewers and I think what you need to clarify here is, why there is this change in inventories and perhaps if you can give us a sense of what happened after the quarter close which makes you still feel comfortable with your guidance for '12, because I think people are concerned here that there was a sales miss and that hasn't happened pretty much in the past much. So can you just – I don't think you were clear enough on the brewer sales and why they lagged NPD data, but perhaps you can answer it from what you've seen in the past month?

Frances Rathke

This is Fran, Akshay. One thing I think that may be helpful for in terms of where we essentially fell short of our estimates on the top line. It was really driven by the K-Cup portion pack demand, as we talked in terms of we overestimated what we anticipated primarily in the grocery and club channel what K-Cup portion pack sales were going to be in Q4. We really did not feel that our estimates for the brewers for our fiscal fourth quarter, that is not where we came in lower than our estimates. So that just to clarify that. Relative to how confident are we in terms of forecasting now our fiscal '12 and in the short-term our first quarter in fiscal '12, we're off to a solid start. We've got October data in and starting to ship in November. We are seeing the pull through data and point of sale come in very strong which gives us confidence and we believe our overall demand model for our installed based driving what the portion pack demand will be. For fiscal '11 as well as prior years, it's been very predictive. Now, obviously we had choppiness from Q3 to Q4 and that was really about us trying to predict our shipments into various customer channels. I mean, obviously we missed, but we’re confident in our overall model to predict over at least a year easily at year end and quarter-to-quarter we're doing more work to try to be more predictive.

Michelle Stacy

This is Michelle Stacy. The one thing I would also add is that when we report brewer shipments, it’s shipments going into all channels away from home, direct in all of the different retail channels, whereas NPD data reports consumer movement which is a very good indicators of consumer sentiment and their desire to purchase and that NPD data reflects only some of the channels, it does not reflect direct channels, Away From Home channels and it doesn’t necessarily even include all of the different retailers selling brewers. So you have to be careful in how you compare the two data’s. What we get very excited about is the fact that we see the strong consumer sentiment in the month of September with our Brewer unit sales in NPD being up 73%. That gives us some confidence going into the holiday season that the consumer is excited and showing up to purchase the brewer.

Akshay Jagdale – KeyBanc Capital Markets

Great. Thanks again for the additional disclosure. I’ll get back in line.

Operator

And next we’ll move to Mark Astrachan with Stifel Nicolaus.

Mark Astrachan – Stifel Nicolaus

Yeah, thanks and good afternoon everybody. One clarification and then one question. So, are you now the profitably on the partner brand K-Cups is not equal to your own? And then the question is, I was a bit surprised by the increase in inventory. Could you discuss a bit why it was up 156% year-on-year by my math which was ahead of sales growth, especially considering your previous commentary on being capacity constrained? And then related to that, could you describe the changes in wholesale customer ordering patterns, especially considering when you fleshed out K-Cup expectations, you called that grocery and club, but not traditional channels like Bed Bath?

Larry Blanford

Mark, on your first question, as we have indicated, we do not communicate specific terms regarding our licensing relationships with any of our partners. So we have – what we have said is that we have very thoughtfully considered, and still as we go forward, contemplate brands into the system. There is a couple of key criteria. One criterion that we use is that any brand that would come into the system, we want to make certain would be meaningful to consumers, that's number one. And then number two, as we've said all along, that to bring a brand into the system, for it to make strategic and economic sense for us, that we need to be confident that the brand and the entity that owns the brand is in fact going to commit brand resources to help drive awareness for the system and brewer adoption. So, and I think as you have witnessed Folgers last year and this year, we think is doing a great job in their advertising Dunkin’ Donuts as well. And it is within that overall context of our model that we've said that consumers need to buy whatever product that they desire to buy. And we are confident as I mentioned in my remarks that with 25 K-Cup portion pack brands sold in over 35,000 locations and now across a number of product categories, that we are confident that we have an ability to manage volume and profitability, and that is what we have said. Fran, do you want to take the second question?

Frances Rathke

Mark, this is Fran. Could you just – if you could repeat your inventory question, I just want to make sure I'm answering what you wanted to get at.

Mark Astrachan – Stifel Nicolaus

Sure. So, it was up 156% year-on-year which was ahead of the sales growth, especially considering the previous commentary you talked about in being capacity constraints. I guess I'm trying to figure out why inventories are building when you've talked about running your equipment basically 24-7? And then the second part of it was, I'd like a bit more detail on the changes that you talked about in wholesale customer ordering patterns, especially because when you fleshed out what you talked about for K-Cup expectations, you called out what was going on in grocery and club, but you didn't talk about the traditional channels like Bed Bath and other stores which are a greater percentage of your overall K-Cup sales?

Frances Rathke

Okay, great. Well, so on the first question about inventory and it is highlighted in our press release in the balance sheet highlights. So, inventories were up significantly up over September of last year at $672 million and the increase this year, unlike other years I think for us is we really saw a big increase in the raw material side because of most notably the Green coffee volume and the price of the coffee is up over 65% year-over-year. So that drove a big piece of that $136 million of the increase, and then the $273 million of the increase is in finished goods, with about half of that increase coming from K-Cup portion packs on hand and the other half from the brewer side. And the K-Cups – in terms of as we noted in our Q3 remarks, we caught up in terms of our ability to feel confident that we could produce K-Cups on a week-to-week basis to meet the weekly demand. So we were not essentially short if you will in Q3 or Q4 on meeting orders. Then as to, I don't know – Scott, did you want to comment?

Scott McCreary

Just to build on that a little bit, you're exactly right. Going into Q1 of fiscal year '11, we were capacity constrained and we had very low inventories and now we have caught up from a capacity standpoint and we've come into this fiscal year with inventories that we think are appropriate to support the growth of the business and we are now in capacity situation that allows us to meet the weekly demand just as you said.

Frances Rathke

Your third question, Mark, about customer shipments. So once again this is comparing what our previous estimates were versus what actually happened in Q4. So coming off of a very, very strong Q3 which we noted was very strong and that we anticipated a lower growth rate on portion packs in Q4 where we essentially overestimated, our shipments in Q4 was primarily in the club and the grocery channel. It was not in the retail or department store channels.

Mark Astrachan – Stifel Nicolaus

Okay, great and just one last one, what’s the tax rate you are assuming for next year?

Frances Rathke

The tax rate, I don't know if we – I think it’s approximately 37%.

Mark Astrachan – Stifel Nicolaus

Great. Thank you.

Operator

Next we’ll move to Bill Chappell with SunTrust.

William Chappell – SunTrust Robinson Humphrey

Good afternoon. I am sorry to go back to this but – back to Mark's questions. You previously said you’re kind of agnostic whether it’s your brand or third party brand on a penny profit basis. Is that still the case?

Larry Blanford

We've never said that, Bill. We’ve said that we are at a high level with respect to the private or the licensed brands and that the model is fairly indifferent to where consumers purchase. Be very clear, we have – the agreements we have with all of our licensed partners are such that we are – they are confidential and we are not able to communicate what those terms with each of those partners are. Again, what I have said is with the 25 brands and over 35,000 locations and multiple product categories that we're participating in, that in essence provides a profit cube, if you will, that gives us significant flexibility to manage volume and pricing. We've been very thoughtful in this. If you look at the brewer side of the equation, we have brought brewers into the system that are positioned both below and above our Keurig brewers, which allow us to expand the demographics and appeal of the overall system to more and more consumers and at the same time maintain the premium image of the system. Likewise in beverages, we have been very careful to – thoughtful to bring mainstream brands into the system that help us expand the demographics of the system and drive more system volume and adoption of brewers and at the same time bring in brands that are at the premium end, which provide margin opportunities for the system. It's really great having those brands in the system and on both sides giving us tremendous flexibility we believe to manage that profit cube going forward.

William Chappell – SunTrust Robinson Humphrey

Okay. Just moving to the – the SG&A side was certainly a little bit higher than I expected in the quarter and I think you had called out, something that had to do with Van Houtte and the transition there. Just trying to see how that transitions to 2012 or some of these expenses start to roll off, or they continue and then with that the ad budget. I mean are we looking at similar type increases that you've had in the past few years for the holiday season in term of the ad budget or does it scale back a little?

Frances Rathke

Bill, this is Fran. In terms of Q1 of fiscal '12 similar to the other previous few years in terms of Q1, that's the quarter where we spend all of our holiday advertisings and so we're anticipating a ramp there again in terms of an increase over last year's Q1 for our holiday advertising campaign. And then I don't think we're stating the absolutely dollar increase, but I think you will see an increase there. But in general not greater than what we anticipate our growth in sales.

William Chappell – SunTrust Robinson Humphrey

Okay. Thanks.

Operator

And next we’ll move to Alton Stump with Longbow Research.

Alton Stump – Longbow Research

Yes, thank you. Good afternoon. Just, I do realize that you guys don't provide K-Cup guidance any longer on a full year basis, but within your sales number that you have for full-year '12, any color you can give us as to what you think ballpark we might see in terms of K-Cup shipment growth in full year '12?

Frances Rathke

What I would say is we've given top line guidance for the year of 60% to 65%. We did not own Van Houtte the whole year this year in terms of the first quarter. So we have that to anniversary starting in Q2. In terms of top line, I think so much of our business is driven by getting our brewers into more and more households and then driving the portion pack demand. I think in terms of overall growth in our system of K-Cups, it will be more than the 60% to 65% because we're – we've got Van Houtte as part of our system now, really creating much more demand now up in Canada. But I think – once again we're not giving out the specifics, but a little north of 60% to 65%.

Alton Stump – Longbow Research

Okay. And then just real quick follow-up. With the inventory being up so big in fiscal 4Q, any idea ballpark as to how much Starbucks had to do with that obviously getting in front of that launch, if anything?

Scott McCreary

Alton, this is Scott McCreary. Starbucks would have been a very small portion of any inventory in that as we've coordinated with them and we packaged their product, it shipped out fairly quickly within two weeks. So it’s a very small portion of it.

Alton Stump – Longbow Research

Okay. Thank you.

Operator

Next we’ll move on to Tony Brenner with Roth Capital Partners

Anton Brenner – Roth Capital Partners

Thank you. I have a clarification question and then an actual question. When you are referring to next generation platform for K-Cups, are you talking about the newly designed brewer and the newly patented K-Cup that goes along with that?

Larry Blanford

No, Tony, let me try to clarify it because there are several things going on. Within our current platform, the K-Cup platform, we have continued to innovate within that platform and a significant innovation is the advanced K-Cup portion pack which does allow us to put more coffee into the portion pack and is being used for products like Barista Prima, our Brewed Over Ice coffee and for Starbucks and we have applied for patents for that particular technology. So that’s our current platform and continued innovation in that platform. When we're talking about next generation, we're talking about a second platform which will use a different portion pack technology that for which we already have patent and that next generation is what we're referring to as a new platform that we will be introducing sometime in 2012, that is our plan. And when you look at the capital that we've outlined, our expenditures in '11 and planned in fiscal '12, when it says next generation, that’s the platform that we are referring to. Then there is a third platform which is a platform with Lavazza that is going to leverage their expertise in espresso with the one-touch brewing capability of Keurig to develop yet a third platform, and we expect all three of those platforms to be in market and working in a complementary fashion. Hopefully, that helps the understanding.

Anton Brenner – Roth Capital Partners

Yes. Before we get to the third generation let me start at the second generation. When you begin selling or launching second generation brewers and rolling those out, will you continue to sell the current brewer version as well?

Larry Blanford

Absolutely. So when I say that we expect them to work in a complementary fashion that is what I mean. So we would expect to take the current platform and continue to innovate around it, continue to keep it viable, continue to produce brewers for it and portion packs, and in fact we may want to look to expand the demographic reach of that system. While we then bring the next generation in and as I have talked before, the next generation is expected to be a premium system to the current generation. So we envision that they will work in a very complementary fashion. Certainly, some consumers that have the Keurig system will choose to upgrade to the new system, but we envision marketing both systems. We think both together will be a very powerful representation of single-serve opportunities to the consuming public and will continue to allow us to maintain our leadership in single-serve. That is also then the third platform just continues to add to that because it opens up espresso and espresso-based beverages and again allows us to maintain a position in the marketplace where we are leading in single-serve technology bringing all three platforms to market.

Anton Brenner – Roth Capital Partners

Sure. Regarding the Lavazza platform, the third platform, which you've said would be launched hopefully into the holiday season a year from now. What kind of brands are you talking about? Would that be marketed under you existing brand platform or completely new brands or would it require new licenses? What exactly will unfold?

Larry Blanford

Good question. We've not communicated yet what brands will be part of that third platform, that espresso platform.

Anton Brenner – Roth Capital Partners

Would you like to take the opportunity?

Larry Blanford

But we expect that Lavazza will be part of it, but beyond that we've not communicated the brands.

Anton Brenner – Roth Capital Partners

Okay. Thank you.

Operator

And next we’ll move to Greg McKinley with Dougherty.

Gregory McKinley – Dougherty & Co.

Thank you. Can you help us understand whatever information or perspective you have in terms of inventory levels within your distribution channel with your retail partners relative to how that channel may have been positioned from inventories in the past? Do you think that that is linked at all to some of the buying pattern changes that you noticed in grocery and club channels? And how do those retailer positions sort of give the company an opportunity to continue supplying aggressively in the holiday period?

T.J. Whalen

Greg, this is T.J. I'll probably start with part of the answer relating to grocery and club, and leave it to John to talk about specialty retail and department. So, as I think, Larry spoke about, we did see in Q3 and Q4 some factory out sales fluctuations. Scott and Fran and Larry also have suggested, part of that was related to catch-up. So we have been chasing capacity to support our customers' needs for quite some time and we finally caught up. Part of it related to assortment build, so we are introducing a number of new products at the time and promoting them heavily, and in some channels like club when you take in an individual incremental item it can actually have a very significant effect. There probably was also some impact in terms of anticipation of pricing action which became apparent to a number of customers. What that drove was heavier than expected ordering in Q3, subsequently or related expansion of customer inventories as they took in those heavier than expected orders.

And then in Q4, they worked down through that inventory position to normalize it and that's what caused a bit of a gap in terms of our order pattern. Now, as we analyze the situation and we look at consumer pull through data, we're not at all concerned with underlying demand. We see that as a very steady consistent growth. If you look at IRI over the past 12 weeks which equates to our fiscal Q4, you're talking about net sales gains of 146% year-over-year. And so we feel very confident that the consumer is showing up and there was just kind of this aberration in terms of customer order patterns and related customer level inventories.

Gregory McKinley – Dougherty & Co.

Yeah. And given the demand that you can see on the consumer side and knowing what you do about what you've provided to your retail partners, supposedly then you would have enough data to sort of assess where you think those channel inventories are. Do you think they are substantially corrected then at this point from maybe getting a little extended previously?

T.J. Whalen

Yeah, I think so, Greg. I think they are in a good position going into holiday. I don't think it's frankly too much or too little and we're all going to see how the consumer shows up. But we have every confidence that we are delivering against our longer term model and believe that inventory positions are appropriate.

Gregory McKinley – Dougherty & Co.

Thank you. And then I noticed in the comments here, we actually identified K-Cup portion packs were contributed by 52% increase in volume. So I am assuming that actually means units and then you break out price and then the acquisition of Van Houtte. Am I in fact reading that correctly; first of all, and then secondly, if so, can you maybe give us a little context for how that volume trended earlier in the year so we can get a sense for the cadence of those volume changes during the course of the year?

Frances Rathke

Sure Greg, it’s Fran. You definitely interpreted that correctly. In terms of Q – I think we talked last quarter Q3 overall, what was our volume growth ex or excluding owning Van Houtte, and I think we were close to the 100% or so versus 52% growth or percentage point growth this quarter. So you can see a pretty big difference there. And then in terms of Q1, Q2, we were in approximately the 70%, 60% range.

Gregory McKinley – Dougherty & Co.

Thank you.

Operator

Next we’ll move to Bryan Spillane with Bank of America Merrill Lynch.

Bryan Spillane – Bank of America Merrill Lynch

Hey, good afternoon. Just one follow-up I guess on the last question. If just understanding the differential in terms of the K-Cup growth in the quarter versus what your forecast was. Your forecast would have been in that – more in that 70% to 80% range and the difference between that and the 52% is basically the amount of inventory destocking that had to occur. Is that basically right?

Frances Rathke

I think we were definitely anticipating lower unit volume than 100% growth that we saw in Q3, obviously not as much dropping down to the 52%. So I think – I don't know if it was as high as 80%, I think it was in the 70s.

Bryan Spillane – Bank of America Merrill Lynch

I guess maybe to put it in another way, kind of dimensionalize if this was just a pothole. There is just a shipment timing thing and if demand and shipments are going to match each other over the next year, has that – that demand rate was running in the 70s and then it was 100% and now it's 52%, but is the full year volume growth rate on K-Cup the right pace of growth right now?

Frances Rathke

Bryan, it's Fran again. I know I’d mentioned it earlier. We're really comfortable and with our – what we call our demand model of what we believe our installed base is and therefore what consumer is going to consume that we need to ensure we make enough K-Cups, and I think the model as we noted in our remarks, we've had it tested now by outside experts, and we as well as the experts feel it's a very accurate and predictive model. So, I think overall for fiscal '11 the portion pack volume came in very close to what the model predicted, and I think once again, we were comfortable that we can rely on this as we go forward into fiscal '12 and the future.

Bryan Spillane – Bank of America Merrill Lynch

Okay. And then just amortization expense, I think it came in – sequentially at least, it came in about $4 million lower than it was in the previous quarter. Is there any change in terms of what you're expecting for D&A in 2012? Or if you can give a D&A expectation for 2012 maybe?

Frances Rathke

I haven't given that out. I think, we’ll just pass, Bryan, on giving out an estimate right now.

Bryan Spillane – Bank of America Merrill Lynch

Okay. But it was lower in this quarter versus the previous quarter. Is that right?

Frances Rathke

I don't know. Let me look at my EBIT calculation, hold on. Depreciation and amortization, amortization was fairly steady here – one moment sorry. Q4 depreciation and amortization. Q4 depreciation was $21.7 million and the amortization was $11.8 million and Q3 was $19 million. So, it went up a little bit on depreciation, maybe $2 million and amortization was essentially the same.

Bryan Spillane – Bank of America Merrill Lynch

Okay. Alright, thank you.

Operator

And next we have Jon Andersen with William Blair.

Jon Andersen – William W. Blair & Co.

Good afternoon. Thanks for taking my question. I’ll keep it to one. I’ll just make it a multiple part. You mentioned that the K-Cup consumption rate on the, I think the At Home reservoir brewers was holding steady at about two per brewer for day. I'm trying to understand what percent of brewers, At Home brewers are reservoir brewers and for those that are not, I guess, do you have a sense of K-Cup consumption rates on those. What I'm really trying to kind of get at is maybe a blended average and then the follow-up to that would be just as – if you have any thoughts on how the consumption rate might be expected to trend over time as you expand kind of the system to a broader range of demographics. Thanks.

Larry Blanford

Yeah, Jon, this is Larry. All we have reported is the reservoir at home brewer model consumption. There are other models that we sell. We have suggested that the Mini is less. We haven't suggested what, but clearly the Minis from its inception was positioned to be a secondary brewer. Now there are a fair amount of Minis depending on the situation. They are used as a primary brewer, but true to our positioning, there is a percentage that they are used as a secondary brewer. In terms of consumption though, going forward, as I mentioned in my comments, we use that as a tool to help develop our demand forecast and that demand forecast of course that we are focused on is usually the next 12 months. And so what we've said beyond that, that consumption could go up or could go down. There are certainly factors that could take it either way and we're driving some of those. As an example, I've talked before about the fact that what we are really focused on is the increasing our share of household non-carbonated beverage consumption.

In that regard, we would love to have a household invest their money to have multiple brewers. One on their kitchen counter, one on their lower-level office, one in their weekend getaway, one on their boat dock, whatever. We would like to make sure that the brewer is available to them. And one of our kind of guidelines that guardrails, if you will, that we've been operating the business by, is not subsidizing the brewers, because we want to encourage consumers to have multiple brewers, and we don't want to subsidize where the consumption per brewer becomes critical to the fundamental economics of that business. So if a consumer has two or three brewers and they've put that money up and even if the consumption per brewer may go down, the consumption per household may go up.

So in the example I’ve used, let's say a family has a brewer on the kitchen counter. It consumes four – they're consuming four portion packs a day, they add a second brewer to the household – in the home or extended household and now we pick up two more per day. So now you're at 6, but you would say the consumption rate per brewer just dropped 25% from 4 to 3. But I would say, our share of that household's non-carbonated beverage consumption just went up 50% from 4 to 6. On the other side, of course, we are very aggressively attempting to develop new beverages in new categories, such as Cafe Escapes and our Green Mountain Naturals, Hot Apple Cider and our Brewed Over Ice products. Our initial data suggest that those non-hot coffee beverages are highly incremental to consumption. So as we go forward and we continue to develop those and we've talked also about more beverages coming.

In the last conference call, I did suggest that another area we were working on was kind of under a broad banner of Health and Wellness. So, we have more beverages coming and so the degree that we are successful in bringing forward new beverage categories, those in fact may cause the consumption per household to go up and would drive consumption per brewer up. So I guess I would just say, as people are thinking about modeling in the longer term to try to get some sense of value, that there is factors that could kind of go either way. But we're not sitting here static, we are going to try to drive it in the positive way and again it's consumption per household. So hopefully that gives you some insight as to how we're thinking about it.

Jon Andersen – William W. Blair & Co.

It does. Thanks for all the detail.

Operator

Next we’ll move to Mitch Pinheiro with Janney Capital Markets.

Mitch Pinheiro – Janney Capital Markets

Yeah, just a follow-up. With Green Coffee costs, it looked like it hurt your gross. Even with pricing, it looked like it hurt gross margin by 150 basis points. Did I read that properly?

Frances Rathke

Mitch, it's Fran. Yes, you did. In Q4 it did.

Mitch Pinheiro – Janney Capital Markets

Okay. So you took pricing. I mean, how is that going to look in the first quarter and through the remainder of '12?

Frances Rathke

I think we're essentially trying to maintain our gross margin percentage. So I think Q1 it's especially towards the latter part of '12 as you've seen the coffees come down a bit. So that's factored into our estimates.

Larry Blanford

Mitch, this is Larry. Our first two quarters our coffee cost are pretty high because we were buying that coffee when the C price was getting up on $2.90, $3.00, $2.80, $2.90, and so obviously that – we have to work through that first couple of quarters. Prices have come down and I think, Scott, we’re now bought out pretty much through Q3 in our fiscal year? I'm asking a question, Scott.

Scott McCreary

Yes, correct. So consistent with our overall Green Coffee purchasing, we're in that six to nine months and we're all through Q3 at this time and starting to purchase into Q4. So we have that pretty well locked.

Larry Blanford

Right. So we definitely would expect some benefit later on in the year and we'll see what happens in Q4 as we move along here to Green Coffee prices.

Mitch Pinheiro – Janney Capital Markets

So, in the early quarters, I mean, have you taken enough pricing? You are saying, I guess, Fran, to maintain your percentage margin?

Frances Rathke

Yeah, I think for Q1 we're still somewhat a little bit of pressure heading into the quarter because of the higher purchased coffee and then it eases up to ensure we have back to our target margins more into Q2 – obviously Q3 and Q4. So Q1 I would say we're getting probably close, but still have some pressure.

Larry Blanford

I'm glad you brought it up, Mitch. I would just add to the list of accomplishments for the organization. I mean in the fiscal year the organization raised prices twice. That's not what we would like to do, but what we said we will do as we need to given input cost rises. And as I'm sure you're aware, it takes a lot of detailed planning and a lot of organizational energy to work across all of our customers to manage those price increases. We've said that our goal is to maintain margin percent and I think we will be pretty close to that, plus or minus a little. But I’m very proud of the organization. Amongst the list of accomplishments I would add those to the accomplishments in fiscal '11.

Mitch Pinheiro – Janney Capital Markets

Okay. Just one more minor question. I noticed that you had $1 million of royalty revenue in the fourth quarter. Where did that come from?

Frances Rathke

Mitch, it's Fran. Half of that, about 50% is Keurig – still had…

Michelle Stacy

20.

Frances Rathke

20 royalty income and UCC which is our JV partner over in Asia, or Japan primarily. Then the other piece comes from the Canadian business unit, Van Houtte relative to the Bistro, the franchisees.

Mitch Pinheiro – Janney Capital Markets

Okay. Thank you. Very helpful.

Operator

And next we’ll move to a follow up from Akshay Jagdale with KeyBanc Capital Markets.

Akshay Jagdale – KeyBanc Capital Markets

Thank you for taking the follow up. I just wanted to ask another follow-up on the CapEx, just because I think it's a very important issue, and I appreciate you being cautious because of competitive reasons. But can you just help us understand; I mean in terms of the CapEx build up, how much of that is an offensive strategy? Because from what we know the packaging capacity or the companies that are providing you with these machines, there is very few of them and so in a way by keeping them occupied with a couple of years of demand, you are also preventing others from getting into the market. So that's – one question is can you just help us offensive, defensive on the CapEx? And then related to that, has the costs of your packaging lines gone up significantly? If you can give us a sense of how much the new generation line costs relative to the $5 million to $6 million that you had mentioned before in previous calls for all the classic Keurig packaging lines. Tat would be helpful.

Larry Blanford

Okay, Akshay, I will try to remember all the parts of that question and I’ll have folks help me here if I miss. This is Larry. We are not ordering lines from a defensive posture in terms of – if your notion is trying to keep these partners busy. Believe me they are plenty busy and we have been actually working with them and pushing them to increase their capacity, but it's just not from a defensive standpoint of trying to ensure that they have got plenty to do. So that's not what it is. We have said I think on our last call and included in our capital, we are attempting to ensure that we have above and beyond our specific demand forecast, consumer demand forecast. A little bit of excess machine capability to ensure that we are providing good service to all of our customers and to the extent if any additional consumer demand manifests itself, that we can take advantage of it.

So, maybe from that perspective, you might suggest that there is a little bit of a defensive and/or offensive aspect of the capacity. Our machines – our lines in essence have gone up in cost, but they've also significantly gone up in speed and throughput. I don't have the numbers in front of me. I would expect on the K-Cup platform as we've gone along, that we're getting actually some capital efficiency. Even though each line costs more money, the throughput is up and not only do we get capital efficiency, but we're running more throughput also with – we'll be getting some labor efficiency, let me say that. These lines that run faster may have a couple of more people on them, but not to expect that the order lines would have running a similar amounts. So I think we are getting some capital efficiency and some labor efficiency on the K-Cup portion pack platform lines.

Now, on the next generation, we are – obviously we developed new packaging lines, new packaging equipment to support that and those lines were developed in part by our own engineering team at Keurig, in-part by some partner companies and as I've said before, even related to someone wanting to enter the K-Cup portion of that business, the first few lines you develop are generally pretty expensive because it all new equipment. It’s R&D and you generally start our slower in line speed on initial line. So we're kind of going through all of that I would suggest on our next generation. Those lines won't immediately start out at the same rates of our current lines, but we would also anticipate that over time we will continue to make advancements on throughput on those lines and efficiencies will go up over time with that equipment as well. So hopefully that gives you some perspective.

Akshay Jagdale – KeyBanc Capital Markets

That’s helpful. Just one more on the same topic. So in terms of the buffer you're building for yourself relative to what you were doing before. I mean, can you just put it in percentage terms. So let's say you are planning x demand and now your x plus whatever and a buffer on top so that you don't have capacity outages. So just…

Larry Blanford

I would say in general we're targeting to have maybe 7% to 12% of extra capacity and that's machine capacity and then we can decide, if we have the equipment on the floor depending on how a given year is developing, we can decide to crew it around the clock, crew it for a couple of shifts or whatever. But we've got about a year's lead time for packaging equipment, similarly for roasting equipment. Crewing our lead time is more like 10 or 12 weeks to hire folks and train them and get them into a position where they can began to safely and efficiently operate the line. So we're constantly trying to stay up. One of the great things about this business is that on top we've got this recurring revenue stream of income, but the capital that we use is applied in increments and that's great. Increments for our packaging lines and increments for roasting modules and we can speed that up or slow that down. So the overall capital efficiency of the business from that perspective, in terms of how capital is applied, is very positive. I've been in other businesses where you're going to put in a new chemical plant or paper plant and you've got to make a huge bet today and that plant doesn't come out of the ground for three years and you can't build half a plant. So we can speed up or slow down as necessary as we go forward. So we feel really good about our balance sheet, feel really good about our ability to apply capital as we need to against this business opportunity.

Akshay Jagdale – KeyBanc Capital Markets

I promise that this is my last question, but.

Larry Blanford

Okay.

Akshay Jagdale – KeyBanc Capital Markets

But in terms of your sales growth, if I do that math correctly I think for this year your organic sales growth was roughly 58% I think and you're projecting 60% to 65% growth for next year, and I believe that includes a drag from the sales of the assets – both the fresh assets. So either way, I mean, it looks like there is an acceleration in organic sales growth that you're projecting. What's driving that?

Frances Rathke

Akshay, it's Fran. I think the portion pack – the demand for portion pack ended up – for fiscal '11 net sales K-Cups were about 104% in dollars and we know that 76% point increase was due to volume. So I don't where the 56 – I think that's Q4 maybe you are thinking. And then buying Van Houtte added another 10 percentage points too for volume of K-Cups or net sales of K-Cups.

Akshay Jagdale – KeyBanc Capital Markets

Another way to ask it is, are you projecting an increase or are you expecting an increase in sort of organic sales growth in your Keurig system?

Michelle Stacy

I think for the overall system of portion packs, we're projecting a very similar growth rate as we had for '11 in 2012.

Akshay Jagdale – KeyBanc Capital Markets

Okay. Thank you very much. I’ll pass it on.

Operator

And we’ll take our follow up from Scott Van Winkle with Canaccord Genuity.

Scott Van Winkle – Canaccord Genuity

Hey, didn't think I'd ever get back in. I really appreciate in the prepared remarks that are online, go in detail point by point answering some of the questions that have been flying around the last few weeks. To keep on that topic, and there's a lot of questions about CapEx and it’s been a big issue with some investors for the last few weeks. The numbers you gave for each of your portions of capital expenditures for 2012 was great. The one that jumped out was the $175 million of physical plant spending. Is the biggest chunk of that Virginia? And if you could just break it down a little bit more, a big number since that's been such an important topic.

Frances Rathke

Scott, it's Fran. That includes Virginia. We also mentioned we have a huge expansion also going on up in Vermont. We noted the square footage that we're adding in our…

Larry Blanford

400,000 square foot addition.

Frances Rathke

Right, in terms of Vermont. So I think that's also in there. In addition, not as significant, we are needing more facilities for general office space as well, both down at Keurig and up here in Vermont. But I think the big pieces of the 175 are Virginia and Essex Vermont. We are also doing, as we noted, 100,000 square foot addition up in Montreal, primarily just space for packaging lines.

Scott Van Winkle – Canaccord Genuity

Okay, thanks. And just a follow-up on the questions about guidance and maybe you said this and I just, I missed it. Is the portion of that 2012 guidance attributable to the second generation brewer? Not the Lavazza one, the new generation of brewers.

Larry Blanford

Yes, we would have our next-gen introductions built into our guidance, not the Lavazza system. We may have some R&D expenses that are build in, but not the type of launch expenses that we have built into our next generation filtered coffee system.

Scott Van Winkle – Canaccord Genuity

You want to say when your revenue contributions in that system hits your forecast in which quarter?

Larry Blanford

Not yet. We are working towards it, but again we remain very excited about it.

Scott Van Winkle – Canaccord Genuity

Can’t blame you for trying. Thanks.

Operator

That does conclude our question-and-answer session at this time. I'll turn the call back over to Mr. Blanford for any final or additional comments.

Larry Blanford

Well, I would like to thank all of you for joining us today and for your continued support of our company. Again, know that our 5,600 plus employees are working very hard on behalf of all of our investors to make this a great company. Thank you very much.

Operator

That does conclude our conference call. Everyone, we do thank you all for your participation.

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