Green Mountain Coffee Roasters Earnings Call Nuggets: Starbucks Partnership and Sales Force Details

Green Mountain Coffee Roasters (NASDAQ:GMCR) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Starbucks Parnership

William Chappell, Jr. – SunTrust Robinson Humphrey: Starting up on the Starbucks partnership can you give us a little more color in terms of I guess one, does this supplant the prior relationships so does the five year start today. And then two, maybe you can – what’s your expectations are for international expansion, I mean are we going to see Keurig machines in Starbucks stores around the world or and how fast will that be and how should we be looking at from that standpoint?

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Brian Kelley – President and CEO: First the agreement starts with the signing of it here now. The second answer is that, as we look and develop our international plans and we look at Starbucks current plans and their future plan will make the decision as to when we launch and where we launch and where we launch. Most importantly, the partnership is powerful for North America. It will really continue to build our North American business. Now, there’s no question we have opportunity outside North America, but this is a North American partnership today and we know it can get even stronger and we’re excited about that, and the global growth will be on top of that. But it’s not just about global growth, it’s about North American growth, and we know that when the system grows and any brand in the system grows with it. So, our job is to continue to grow the system and we think that this Starbucks deal, they are obviously a very, very strong brand. They do really well on our system. They’re one of 32 brands in the system and we can continue to make our system stronger with this deal.

William Chappell, Jr. – SunTrust Robinson Humphrey: Then switching just to gross margins, I guess both on your comment about getting to 40% sustainable and also looking at green coffee costs, you are at 41 this quarter, so I know this is seasonally higher than average, but just help us understand kind of the path to the sustainable 40%. And then also, did you see the full benefit of kind of lower green coffee cost yet with your hedges rolling off or are we still yet to get there?

Brian Kelley – President and CEO: Well, I’ll talk broadly about gross margin in the 40 points and then we’ll get into coffee costs. Yes, we hit 41% gross margin this quarter, but as you saw, a significant portion of it is due to green coffee costs which won’t be with us forever, and they may go the other way at some point in the future too. That said, we expect to continue to get those coffee costs as they are today through rest of this year. And if you look at other parts of the gross margin, our gross margin benefited this quarter because of the mix shift, as we sold less brewers in fact less brewers than we did last year, it lets the portion pack overwhelm the gross margin in a sense which is terrific for our gross margins, so again the power of the model. We don’t want to have brewers go backward year-over-year and so we won’t have brewers go backward year-over-year typically, and so we won’t always have that benefit. So if you look at where we’ll move, we will continue to get mix that benefits us, we will continue to get operational effectiveness, we will continue to get we hope quality improvement and continue to drive those things, and those are the things that will move us from the mid-30s up to a sustainable 40 plus.

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Frances Rathke – CFO and Treasurer: This is Fran, Bill. Just to clarify. I think on the coffee cost, we had a sizable benefit year-over-year this quarter, Q2. We’re going to continue to see that even better in Q3 and then kind of a similar range from Q3 to Q4.

 

Sales Force Details

Bryan Spillane – Bank of America Merrill Lynch: I’ll keep it at two questions. I guess there’s a ton that we could ask. But I guess the first question, just in terms of the ambition to grow the away-from-home, can you just talk a little bit about kind of the infrastructure, the size of your I guess sales force you have today, just how you do it today and what you would need to build in order to do it to have a bigger business there? Is it going to be hiring of sales force? Is it using third parties to help you get to those channels? Just flesh out a little bit more in terms of what has to be built in order to achieve a bigger away-from-home business…

Brian Kelley – President and CEO: First of all, we know that the foodservice business in particular and away-from-home is a big opportunity for us. I mentioned we have virtually no penetration of it today. And think about our single serve opportunity in foodservice customer. So if I give an example of a small it doesn’t matter the size of the chain it matters the size of the store and in the prevalence the incidence of coffee. A restaurant or a store that’s doing 10 to 20 cups a day is quite different than one that’s doing hundreds of cups a day. But those 10 to 20 cups a day that’s a really good business for us and a single serve opportunity like Keurig we can go in there and allow them to brew a fresh cup of coffee every time with multiple brands and give the consumer some choice and they can deliver an excellent cup of coffee quickly to their customer. Today they have enormous ways and you can think of them and I could mention lots of restaurants and chain that have that proposition today. They brew a number of pots in some cases 10 pots of coffee a day in order to serve just the handful of cups of coffee 10 to 20 cups of coffee but they do it to keep it fresh. And so we can go and offer them a real proposition for them that’s both economical and great for their consumer. Now the infrastructure required to do that than it’s not that large versus what we have today. We have a sizable infrastructure in our away from home business today, but most of it is focused on workplace and that’s where we are most developed in the workplace today it’s where we started the business and we’re really good at it. We will get very good at the foodservice business as well we will bring in some new people, we will bring in some additional people so that we can cover a broader range of the geographies so you will see us grow our infrastructure but we we’ve targeted and we know there’s a number of customers that were actually in discussion with today. I can’t name them that we’re excited about.

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Bryan Spillane – Bank of America Merrill Lynch: But you envisioned having your selling the product and also I guess having an atomization that would service the machine, the inevitable breakdowns or things that happen in the trade, we require that type of investment or would you envision that…?

Brian Kelley – President and CEO: Yeah, we have series in a network of distributors today and John, you might want to comment some on it or T.J., but we have a network of distributors today and salespeople today who do all of that, and that we cover it in workplace and we could very easily use that same network to cover it in our foodservice business as we gain new customers. So, the infrastructure isn’t going to be the challenge. The real challenge is making sure we have the right product and the right brands and that we go out and we aggressively sell it, which quite honestly we haven’t done. We focused on the workplace which we know can get a lot of people excited about Keurig and then they go buy it at home. We have that same strategic capability here in restaurants, where we can watch them – the consumer can come in, they can see the Keurig offering, and then – and maybe bring one to their home as well.

Bryan Spillane – Bank of America Merrill Lynch: Then just I guess the other bigger question related to that is just as it evolves, would it be neutral to your margins like would you expect this channel to be sort of equal to your average or better than or less than…

Brian Kelley – President and CEO: I don’t want to give you one way or the other. It shouldn’t be terribly different than what our margins are today. Away-from-home is a fairly comparable to our At Home business today, and so I wouldn’t anticipate it being that much different. It’s quite different if you’re going into the – what I would call the traditional foodservice business as you know. The foodservice business, it can be very price competitive, and I know we’ll face some of that, but we have a very, very good proposition that we’ll bring to these customers and we don’t think we’ll see margin dilution on this.

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Bryan Spillane – Bank of America Merrill Lynch: Then, just one follow-up, in the 10-Q that was filed this evening, there is a change that’s been made to I guess the definition of a change of control, so it’s related to the change in control severance benefit plan. Can you just not sure exactly – I mean I see what the definition is today, but why was it changed, how is it different from what the I guess the pre-existing plan was?

Frances Rathke – CFO and Treasurer: It’s Fran. The change you are referring to it’s a very minor change and it’s for compliance with 409A, which I don’t know if you guys – it’s a technical – there’s no message or big change there.

Bryan Spillane – Bank of America Merrill Lynch: Okay. So nothing more to read into it than that?

Frances Rathke – CFO and Treasurer: No, correct.

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