Keurig Green Mountain Conference Call Highlights: Shift To Keurig 2.0 "Imminent"

Keurig Green Mountain,GMCRBrian Kelley. Quarterly performance Fran Rathke, Keurig Green Mountain's Chief Financial Officer detailed the company's performance in the quarter. Revenue increased by 5.5 percent from a year ago to $1.02 billion due to a ten percent increase in total portion pack net sales. Portion pack net sales mix was negatively affected by selling more portion packs to brand owners with a lower average selling price relative to a year ago. In total, Keurig Green Mountain sold $128.0 million worth of brewers and accessories, representing a decline of four percent from a year ago. Sales of portion packs rose ten percent from a year ago to $826.3 million while other product sales fell 17 percent to $68.1 million. When Keurig Green Mountain sells portion packs to the brand owner, the company typically charges a lower wholesale average selling price versus charging a higher selling price when the company sells directly to a retailer or consumer. Brewer and accessory net sales declined by four percent, driven by a 13 percentage point increase in brewer sales volume. Offsetting volume was a 21 percentage point decrease from net price realization. Gross margin during the quarter improved by 140 basis points to 43.5 percent as the company continues to benefit from a combination of favorable coffee costs and incremental productivity benefits. Keurig Green Mountain ended the quarter with $1.2 billion in cash and $274 million in debt. The company generated free cash flow of $127 million in the quarter and $602 million year-to-date. During the quarter the company returned $800 million to shareholders and Rathke confirmed the company will remain “active and opportunistic” in its efforts to repurchase shares in the coming quarters. What's in the pipeline? Kelley explained that Keurig Green Mountain is focused on three key priorities moving forward. First, the company is preparing for the “imminent” launch of its Keurig 2.0 hot beverage system. Second, the company continues to focus on the transition to portion packs that will be compatible with the new 2.0 system. Finally, the company continues to innovative and come up with new solutions that will provide consumers with a broader choice and variety. Keurig Green Mountain expects its gross margin to be negatively impacted by added investments in the Keurig 2.0 system. During the quarter, the company invested $103 million in capital compared to $60 million a year ago. In addition to investing in the Keurig 2.0 system, the company continues to set up its Keurig cold dedicated early production center in Vermont. The company already has a production facility in Georgia that the company continues to invest in to bring the product to market in fiscal 2015. In terms of financials, Keurig Green Mountain is expecting net sales growth of high single-digit to low double-digits in the fourth quarter. Rathke did warn investors that gross margin may be less favorable due to transition costs of the Keurig 2.0 system and a less favorable impact from coffee prices. Rathke noted that Keurig Green Mountain continues to expect net sales growth in the high single digits over fiscal 2013. Non-GAAP earnings per share is now estimated to be in a range of $3.71 to $3.78, up from a prior guidance of $3.63 to $3.73. Notable quotes Brian Kelley on the Keurig 2.0 release: “We continue to hit all the necessary milestones and are on track to introduce our new Keurig 2.0 hot platform to consumers this fall. We have ramped production of our Keurig 2.0 brewers and began shipping product customers last week in preparation for the imminent launch. Over the holiday season, we will ship both, Keurig 2.0 and Keurig 1.0 platforms, but our and merchandising will be focused almost exclusively on Keurig 2.0. We expect that 2.0 will appeal to non-Keurig users who are yet to purchase a brewer, because they want the option to brew larger volumes with Keurig's simplicity.” Brian Kelley on gaining market share: “We also expect that Keurig 2.0 will allow us to capture some portion of the 25% of coffee consumption. We estimate that we are currently not getting in existing Keurig households, due to the occasional need for multi-served brewing.” Fran Rathke on coffee and commodity prices: “We are 100% contracted on coffee for fiscal year 2014 [and] approximately 75% locked for fiscal 2015 at higher rates year-over-year. Finally, we will also see commodity cost increases across other portion pack packaging inputs. We have built these factors into our bottom-line outlook.” Brian Kelley on 2015 guidance: “We believe that we can continue to deliver like we did this year on our long-term outlook, but specifically to 2015 guidance range, we generally provide that information in the fourth quarter and we will be doing that again then.” Brian Kelley on keeping technology simple: “consumers told us loud and clear… Anything we do to improve on Keurig has to be simple and 2.0 will be as simple. You put a pod in, you push a button and you get a great cup of coffee or a carafe coffee.” Brian Kelley on white-label pods: “ I know there's rumors and speculation and we are not going to comment on those. It's not appropriate for us to comment on that. The 2.0 interactive technology, we are confident that in the proprietary nature, we are confident in its performance and we are confident that the Keurig designed and produced beverages will be the ones that work in Keurig 2.0 brewer.” Brian Kelley on Keurig Cold details: “We have really said what we want to say about it. We planned to launch it in fiscal 2015. We don't think it's wise to talk yet about what are plans are or any more specifics, some we have already given.”