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SodaStream International Ltd. (NASDAQ:SODA)

Q4 2012 Results Earnings Call

February 20, 2013 8:30 AM ET

Executives

Yonah Lloyd - Chief Corporate Development and Communications Officer

Daniel Birnbaum - Chief Executive Officer

Danny Erdreich - Chief Financial Officer

Gerard Meyer - President, SodaStream USA

Analysts

Jon Andersen - William Blair

Joe Altobello - Oppenheimer

Bill Schmitz - Deutsche Bank

Tavy Rosner - Barclays

Jim Chartier - Monness Crespi

Greg McKinley - Dougherty

Jim Duffy - Stifel Nicolaus

Operator

Please standby, we are about to begin. Good morning. My name is Kyle, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the SodaStream International Fourth Quarter and Fiscal 2012 Earnings Conference Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Yonah Lloyd, Chief Corporate Development and Communications Officer. Please go ahead, sir.

Yonah Lloyd

Thank you, Kyle. Welcome everyone. This morning’s call will consist of prepared remarks from our CEO, Daniel Birnbaum. We filed the 6-K this morning which includes the press release and financial tables along with the CFO commentary document and a supplemental slide presentation featuring business highlights. These are also available at our IR website and on our new IR app for both iPhone and Android platforms.

Present as well are Danny Erdreich, our CFO; and Gerard Meyer, President and General Manager of our U.S. Subsidiary. Following Daniel’s remarks we will open the call for questions.

I would like to remind everyone that certain statements will be made during today’s conference call which are forward-looking within the meaning of securities laws. Due to the uncertainty of these forward-looking statements, our actual results may differ materially from anything projected in these forward-looking statements. As such we can give no assurance as to their accuracy and we assume no obligation to update them.

Results that we report today should not be considered as an indication of future performance. Changes in economics, business, competitive, technological, regulatory and other factors could cause SodaStream’s actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today.

In addition, we will make reference to certain non-GAAP financial measures including adjusted net income, the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s fourth quarter earnings release which is posted on the company’s website.

For more detailed information about these factors and other risks that may impact our business, please review the paragraph in this morning’s press release that begins with the words, ‘this release contains’.

And now it is my pleasure to the turn the call over to the Chief Executive Officer of SodaStream, Daniel Birnbaum.

Daniel Birnbaum

Thank you, Yonah, and thank you everyone for joining us today. We are extremely pleased with our finished to the year. The fourth quarter was marked by tremendous topline growth of 55% year-over-year. Revenue growth was strong across all regions, Americas increased 96%, Western Europe and Asia both increased 31%, and CEMEA was up 28%.

For the first time ever, we surpassed 1 million soda makers in a quarter. Consumables also had a very strong quarter worldwide with sales up 54%, driven by syrup unit growth of 60% and a 26% increase in gas refills. In the U.S. soda makers were up 86% to 568,000, gas refills rose 89% to 890,000 and syrups increased 131% to 2.8 million units.

Strong sell-in was accompanied by equally strong sell-through in the fourth quarter. In the U.S. NPD data shows that sell-out far outpaced door growth. Fourth quarter unit sales of soda makers, syrups and gas refills were up approximately 300%, 140% and 290%, respectively, compared to door growth of approximately 80% for retailers covered by NPD.

While these numbers are outstanding and illustrate growth from both new and same-store retailers, let’s remember that not all doors are created equal and the 80% door growth included Wal-Mart. It’s important to note that our strong retail sale-through was broad-based, spanning all classes of trade from mass to high-end specialty.

Our better than expected retail performance spend all soda maker models including a positive response to the Source, our newest flagship soda maker launched internationally in the fourth quarter at retailers including, Harrods in the U.K., Takashimaya in Japan, Elgiganten in Sweden, Myers in Australia, Media Markt across Europe, The Bay in Canada, and Bed Bath & Beyond and Macy’s in the U.S.

The launch of the Source also generated tremendous media exposure which benefitted our brand momentum and contributed to our overall strong sell-out around the world during Q4.

Our Q4 topline performance generated strong net income growth of 42% on an adjusted basis, which also was above our forecast. With demand higher than anticipated we made every effort to fulfill orders to maintain our strong retail momentum despite the fact we knew this would put a temporary strain on our supply chain and pressure gross margin.

This included a higher reliance on subcontracted manufacturing and even required airfreight of raw materials and finish goods. We called this out during our third quarter earnings call along with the impact from Hurricane Sandy which closed the port in New Jersey during a critical holiday shipping window.

These two items, our increase reliance on subcontractors and the need for expedited shipments were primary reason for the 430 basis points decline in fourth quarter gross margin versus year ago which was also in line with our guidance.

Higher dependance on subcontracted manufacturing will keep gross margins flat year-over-year at approximately 54% for 2013. We expect the drag from subcontracting to ease once our new facility is fully functional in 2014.

With regard to A&P, fourth quarter spend was 22.7% of revenue, a 240 basis point improvement from 25.1% in Q4 of 2011. All in all, we are pleased with the composition and quality of our fourth quarter performance.

That said, we are running this business for the long-term not for one quarter or one year. At this stage in our evolution we are focused on driving continued growth by investing in marketing, innovation, partnerships and channels, and 2012 demonstrated that our strategies are working as evidence by our full year revenue growth of 51% and net income growth of 60%.

I’d like to highlight several 2012 initiatives that have strengthened our market position and will help perpetuate future growth. We enhance the availability of our product portfolio with new distribution and expanded shelf space with existing retail partners.

This included a 50% increase in U.S. retail door count bringing us to 15,000 and 100% increase in U.S. gas change locations bringing us to approximately 9,500. We increased awareness of our brand and category through increase investments in A&P including a broader branding campaign.

We brought innovative products to market that helped generate excitement and improve the user experience. We forged strategic partnerships that are bringing new consumers into our franchise increasing consumer loyalty and generating profitable new revenue streams.

We acquired our Nordic distribution, brought Canada’s distribution back in-house and entered new markets such as Brazil, Chile and Singapore. We strengthened our organization and infrastructure by recruiting top talent and enhancing procedures and systems to drive and support our growth.

Lastly, we broke ground on a million square foot manufacturing facility, even larger than initially contemplated, in order to provide capacity for accelerated growth. This fully integrated facility will come online in stages beginning late 2013 and will be fully operational by late 2014, which then -- which when completed will bring all aspects of our production under one proof thereby improving efficiency throughout our supply chain.

So 2012 was not only a strong year financially but strategically and operationally as well, laying a strong foundation for continued robust growth moving forward. As we begin 2013, the main pillars of our growth strategy remain largely intact. First, we will continue to focus our attention on winning with the consumer by investing in our brand.

Our share of global carbonated beverage is less than 1%, giving us tremendous growth potential, especially considering we have a benchmark as high as 25% household penetration in Sweden. We’re confident we can increase our global penetration and as proven by our successful marketing campaigns in 2012, we will continue to invest in marketing as our main pillar of growth in 2013.

We’re entering the year with strong momentum and brand heat, which will further drive awareness and demand. In the U.S., we kicked off 2013 with a Super Bowl commercial that was viewed by more than 100 million Americans. We leveraged our Super Bowl participation by securing billions of brand impressions with an extensive, fully integrated, global PR program.

This would field partially by an ad we created that was rejected by CBS and ended up getting almost 5 million YouTube views. For the balance of 2013, our plan is to execute an integrated marketing program with emphasis on our growth markets, like the U.S. that will include TV, as well as robust PR, social media, retail marketing vehicles, in-store point of sale and targeted in-store demo activity.

Our second growth pillar is product innovation. We’ll continue our tradition of leverage innovation and partnerships to advance home carbonation and enhance our brand equity and user experience.

During 2013, we’ll expand distribution of the source, launch Soda Caps and introduce new great tasting, better for you flavors. As our business evolves, so do our partnership opportunities with both beverage and appliance companies.

We’ll continue to expand brand relaunched during 2012, such as Country Time, Crystal Light and Kool-Aid. And we’ll introduce V8 Splash and Samsung as well as brand some partnerships we are currently developing, including global brand partnerships.

Thirdly, we will benefit from a full year with retailers and markets we opened throughout 2012, including Wal-Mart and will selectively add new retail partners. In the U.S., this will include broadening our distribution and existing channels and testing in variety of new channels, including DIY, hypermarkets, drug and convenience, and grocery.

We’re also increasing SKU counts at many of our existing points of distribution around the world. These three pillars of growth winning with the consumer, driving innovation and partnerships and expanding distribution will be applied globally. But the U.S. will represent about half of our projected growth in 2013.

With this, we believe we have a sound plan in place to leverage our brand momentum and grow on top of the sizable gains we posted for past three years.

Turning to our outlook, we currently project full-year sales and adjusted net income to increase approximately 25% over 2012. Note that this guidance assumes an effective tax rate of 10% compared with an unusually low tax rate of 1.7% in 2012.

On an IFRS basis, net income is projected to increase approximately 18% over 2012 levels. This guidance includes stock option expense of approximately $11 million compared to $6.2 million in 2012. This increase is primarily related to our long-term incentive program that was approved in December.

As a reminder, under IFRS guidelines, 57% of this full-year expense must be recognized in acceleration in the first year following the grant. The expense associated with these options is expected to decline by approximately 50% in 2014 and each year thereafter.

Looking at adjusted EBITDA which strips out a large swings in stock option expense and tax year-over-year, we’re projecting approximately 34% growth in 2013. I can’t close out a 50% plus growth year without thanking the people that made it happen.

We’ve assembled a dynamic and bold team of professionals that have the passion and the skill set to manage growth of this magnitude and transform SodaStream into a much larger company to create significant value for our shareholders. Thank you all for your hard work and support.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Jon Andersen with William Blair.

Jon Andersen - William Blair

Hey. Good morning everybody.

Daniel Birnbaum

Good morning, Jon.

Jon Andersen - William Blair

I wanted to start by asking about the guidance for 2013, topline guidance for 25% growth. I was hoping you might be able to give us a little bit more color around the sources of that growth, more specifically, maybe by geography, how you’re thinking about the contribution from each of your major geographies as well as the balance between soda maker sales and consumable sales? That would be helpful.

Daniel Birnbaum

Well, Jon, we expect 50% or so of the growth to come from the U.S. that’s, as a reminder, the largest soda maker in the world. And we expect the balance of the growth to come from all the other three regions that we report. And those include markets that are new markets as well as markets that are more mature markets and that’s consistent with what we’ve seen during 2012, where we’ve seen growth across all of the geographies and in all types of market both more mature and new.

As far as the mix with -- between consumables and soda markers, we don’t anticipate a dramatic shift during this growth year. Because we’re in the business of increasing household penetration, we’re so focused on growth, we will continue to sell a lot of soda makers during this year, which obviously doesn’t have a positive impact on our gross margin. The gross margin will deleverage when we shift the mix towards consumables.

Jon Andersen - William Blair

Okay. Great. That’s helpful. And just a question on the gross margin impact in the fourth quarter. Obviously, that was something you talked about in the third quarter, given the higher than anticipated demand, I think largely in the U.S. Where are you in terms of bringing new capacity online or kind of being able to catch up and what kind of impact do you expect in 2013. Is it largely isolated to the first quarter too?

Danny Erdreich

Hi, Jon. It’s Danny. Well, as Daniel said 2013 is still going to be a year in which we will be highly dependent on production of subcontractors and this will be the main issue that will impact our gross margin going into next year. So we will be flat on gross margin going into next year at approximately 54% but main impact would come from this type of production.

Jon Andersen - William Blair

Okay. Do you have an update on -- and this maybe something you do during coming months, an update on the size of the active user base in the U.S. and household penetration at this point.

Daniel Birnbaum

Yeah. We are running research now, which should capture also consumer activity during the holiday, that’s why we deferred it until now and we will also be looking at how the consumer responds to different soda makers and moves to understand what the different soda makers have a different user experience and different tendency towards ongoing loyalty and usage rates. And we will be sharing some of those learnings in the next earnings call.

Jon Andersen - William Blair

Okay.

Danny Erdreich

John, you also see that that we sold 890,000 of gas refills in Q4 and this gas refills don’t represent yet the machines that were sold in the back half of the year, the tenth consumers only in the late part of the year during the holiday season. So based on this, assuming between three and four gas refills per active users, we already reached approximately 0.9% household penetration and if you add on top of that the machines which were sold and ended up with consumers in the holiday season we already went over the 1% household penetration in the U.S.

Jon Andersen - William Blair

Terrific. That’s helpful. Last question. Do you have a -- in Europe, you made terrific progress through 2012 on your door counts on your number of gas exchange locations. Do you have kind of an ultimate I guess door count mind if you look out two, three, four years from now on? How many locations you would expect to be in on the machine side and also gas exchange side?

Daniel Birnbaum

As the user base grows and we see this, another, more developed markets like Sweden or Belgium and more recently markets like France and Israel and Australia. When we see that the user base grows we migrate our distribution from an appliance focus to consumables focus, which means from specialty retail or department store type retail to food and grocery.

And that’s an evolution that’s going to happen in time. It has to happen in a control fashion in the U.S. as well, but there will be the day where you will be able to get a flavor, subsequent flavor in the gas exchange in every supermarket in America and probably in every convenience store as well or drug store. So, I can’t say when it’s going to be but we are certainly going to start testing some of that during 2013.

Jon Andersen - William Blair

Terrific. Thanks, guys. Congratulations on a great quarter and year.

Daniel Birnbaum

Thanks a lot, John.

Operator

Our next question comes from Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Hey, guys. Good morning. I guess I will start with the guidance you guys gave this morning. Could you help us out with the different variables or swing factors involved in that guidance and the reason I asked it because if you look back at 2012, the original guidance for sales growth was 28%, which is 51%. So obviously there were some things that went in your favor last year, Wal-Mart probably be one of those. So could help us out with the different swing factors that they helped you or hurt you potentially in 2013?

Daniel Birnbaum

Well, Joe, you are right. We kicked off 2012 at 28%. Let me even qualify that. It was fairly 25% plus 3% and the 3% was because of the acquisition of the Nordics. So we started 2012 at the same place, we are kicking off 2013. And we are coming off a higher base and we did suggest long-term target of 20% in our topline and 25% bottom line. So where we are headed at and it’s only February, so we will keep you posted as the year progresses.

But as far as swing factors, as I said in my prepared remarks, this year is more about focusing on the consumer and increasing the awareness and the trial and the loyalty of the consumer and of course the household penetration. And it’s a little bit less about pipeline and growing to work out, which has been a lot of the focus until now. And we’ve proven actually in Q4 that we can dramatically grow the business without a dramatic door count, because in Q4 we didn’t have a dramatic door count and the same door growth was very, very strong. We have those numbers. Same-store growth year-over-year was very, very strong.

So, again, focusing on the consumers through marketing, there will be some new countries that we are going to add to the mix, at least one of them will be a strategic market that we will announce later on when we are closer to actually selling.

And some of the selling can come from also some of the partnerships that are in development that we’ve already announced. Some of these partnerships are with big brands. There is a lot of potential in the brand like Kool-Aid that we didn’t yet market. We didn’t really do much to tell the consumer that now they can have that Kool-Aid gas bubbles.

So there is tremendous potential in the business and by the way not only in the U.S., but we have some growth markets out there that have phenomenal potential that we might not be or the investment community might not be focused on and those would include Australia and France and the Czech Republic, which is back in a big way and other wonderful markets around the world.

Joe Altobello - Oppenheimer

Okay. You mentioned Samsung, really, I was just curious if you can give little more detail on the relationships you guys have now. How many refrigerators did they sell last year that will carry your sparkling water offering this year and does it include all of their models, for example?

Daniel Birnbaum

Let me ask, Yonah to take that question because he is the architect of that deal.

Yonah Lloyd

Sure. Thanks, Daniel. Hey, Joe. Samsung is number one leading refrigerator seller in the United States, for what you would say are the high-end refrigerators. Far and away by the way, they have the top spot and like SodaStream they approach markets with high quality. So the first part of this relationship is in more of a high end model. You saw with the MSRPs. So it will likely be about a $3,500 fridge. I can tell you exactly how many units they sell or project to sell, that’s really a Samsung question.

But I think more importantly the idea of the deal is not that we are going to just be in a single refrigerator but that it will slowly migrate throughout the portfolio, because there is no limitation in terms of the size of the fridge based on the way our system is put into that refrigerator. So over time, you should see refrigerators with SodaStream in them going from the more high-end type and migrating down to the more mass type of refrigerators.

Joe Altobello - Oppenheimer

Okay. Understood. And just one last one I guess around the Super Bowl ad, did you guys see any lift from that either heading into it with retailers building up inventory or after it with sell through?

Gerard Meyer

Hi. This is Gerard. The answer is yeah to all of the above. We saw very good response to the SuperBowl, starting with from a PR standpoint where we just got tremendous PR impressions that Daniel talked about in his prepared remarks, so that was fantastic. We got great support from retailers and enthusiasm and that was also great to see and we also saw lift post SuperBowl in terms of sellout.

But really we expect to get the benefit for this for the entire year. I mean, the SuperBowl is a statement we went in front of 100 million people. The retailers know that we are here, we are driving the category. We are driving the brand and that we are here to stay and actually to do very well. We look at the entire year at the benefit of SuperBowl, not just one day.

Joe Altobello - Oppenheimer

Okay. Great. Thanks, guys.

Operator

Our next question comes from Bill Schmitz of Deutsche Bank.

Bill Schmitz - Deutsche Bank

Hey, guys.

Daniel Birnbaum

Hi, Bill.

Bill Schmitz - Deutsche Bank

Could you repeat some CAGNY by the way? So, what is that organic or the comp store growth number for last year and what you guys think it could be for next year in terms of percentage growth, for now you said you had it?

Daniel Birnbaum

Bill, its Danny. Hi.

Bill Schmitz - Deutsche Bank

Hey.

Daniel Birnbaum

What we saw in Q4 is an increase of approximately 20% in same-store sales compared to last quarter, third quarter. Third quarter, yeah.

Bill Schmitz - Deutsche Bank

Okay. Okay. And then how about -- for next year, you assume it a lot less sort of the distribution expansion but could you just take a stab at what you think it’s going to be through the composition of topline growth next year, your comp store versus new distribution?

Daniel Birnbaum

No. I think it’s too much of shot in a dark, but as a consumer marketer to be distinguish from a retail marketer, I’m confident that we’ll be able to grow the user base at existing doors. By the way, we will be increasing our door count and we’ll be expanding our shelf space, but I have no doubt that this business is going to grow just by increasing the velocity at existing doors and the desktops and the loyalty, consumer usage. So, and that’s a way we measure the business. We never really measure the business on the door performance.

Bill Schmitz - Deutsche Bank

Got you. And then, let me, Gerard (inaudible).

Gerard Meyer

Go ahead.

Bill Schmitz - Deutsche Bank

Well, I just ask to, were your retailers on allocation especially in the U.S. during a holiday season and does that mean maybe there is going to be some disfunction snapback in the first quarter?

Daniel Birnbaum

Do you the retail and allocation…

Gerard Meyer

I think he is talking about the Source, were we limited Source doors to just few retailers, yeah. So we saw good sell out certainly in Q4 across the portfolio, across our all of our retailers and across all machines. And that obviously, makes us feel good about what Daniel just mentioned, which is, we’ve got a brand that’s got a lot of momentum going forward in 2013.

Daniel Birnbaum

Right.

Bill Schmitz - Deutsche Bank

All right. Well, thank you, guys. Appreciate it.

Gerard Meyer

Okay.

Daniel Birnbaum

Thank you, Bill.

Operator

Our next question comes from Tavy Rosner from Barclays.

Tavy Rosner - Barclays

Hi. Good morning. Just two follow up questions. Can you give more colors on the new stores? I think I heard 1000 new doors in the states, I’m not sure I heard, correctly, what’s the breakdown for the rest of the world?

Daniel Birnbaum

Are you referring to the year 2012 or to the fourth quarter?

Tavy Rosner - Barclays

No. During the fourth quarter?

Daniel Birnbaum

No. We didn’t breakdown the incremental doors during the fourth quarter, but, Gerard, do you want give some color?

Gerard Meyer

Actually, in fact is that, we didn’t have a material new doors in the fourth quarter, was actually the fourth quarter the year prior where we had a lot of new doors, almost 3000 of them. So this year’s fourth quarter performance was actually with our pipeline and we still did very well, both in the new doors we were in, as well as the doors that we’ve been in the year prior.

Tavy Rosner - Barclays

Okay. Get it. And just a follow up question on the deal you announced with Samsung. Can you -- can quantify the impact on the numbers and also from the marketing perspective. How do you intend to market it, are you going to led Samsung advertise it or you are going to do something together?

Daniel Birnbaum

Tavy, it’s not baked into the next year, will be incremental and as the year progresses, you’ll start seeing the advertising take place, but we are not going to talk about the particulars of the campaign at this point.

Tavy Rosner - Barclays

Okay. That’s helpful. Thank you very much.

Daniel Birnbaum

Thank you.

Operator

Our next question comes from Jim Chartier from Monness Crespi.

Jim Chartier - Monness Crespi

Good morning.

Daniel Birnbaum

Good morning, Jim.

Jim Chartier - Monness Crespi

Hi. First, can you give us an idea of what gross margins would be next year if you didn’t have to subcontract out the incremental soda machine demand?

Gerard Meyer

Yeah. I think it was indicated by, Daniel but demand adverse impact from gross margin going into next year is again subcontracted and when we move to our own facility, our own factory, we should be gaining at least an additional 200 basis points just by producing everything internally or so.

Daniel Birnbaum

And the emphasis, at least, I would remind us that its not only the direct cost of subcontractors, the indirect cost of transportation among factories, right now for example, in Israel we are manufacturing in seven different locations and there is a tremendous amount of transportation going among these factories, which is also impacting our gross margin line.

Jim Chartier - Monness Crespi

And for the fourth quarter ‘12 gross margin impact, how much of the decline was due to airfreighting versus subcontracting?

Gerard Meyer

We indicated in the call, in the Q3 call that we would suffer 200 basis points due to the hurricane, remember the hurricane at the beginning of the quarter and to expedite shipments and airfreights, so this is the indication we provided and afterwards, we did an additional demand for soda markers and it increased slightly above that, but it was a substantial -- it had a substantial impact from gross margin.

Jim Chartier - Monness Crespi

Okay. And do you foresee the need to airfreight to meet demand in 2013 for holiday or we get something over there?

Daniel Birnbaum

No, no, no. The growth in Q4 exceeded our expectations and we have to make a managerial call whether we supply or not. We decided to supply even at recognizing the margin sacrifice. I think was the right decision and the sell-out proved that it was a right decision.

As far as 2013, we are managing it. We are building our capacity through the network of co-packers, subcontractors and we will not be airfreighting, I mean, there will be an extreme exception if we have ever need to do that and I can tell you that, in fact any airfreight within this company requires my personal signature. So the intention is that this will not happen this year.

Jim Chartier - Monness Crespi

Okay. And how should we thinking about advertising and promotion expense for 2013, do you expect it to leverage that and then how is the mix within that changing in the U.S. for in-store demonstration versus TV advertisement?

Daniel Birnbaum

Well, for 2013, we are targeting A&P at around 16% of revenue. It’s a little bit lower that it was for 2012. 2012 were at 17%. But still the 16% represents a $1 increase investment of about 15%.

So, yeah, we will be stepping up the advertising and we are going to allocate more of our mix of our total groups spending to the growth market deliberately. And the U.S. is our most important growth market. So U.S. will get more than its fair share of the total advertising.

As far as where we are putting the money in, this year we are going to increase TV in the mix and reducing store demonstrations in the mix. So and we are doing deliberately because we believe that you need television in the mix to be able to reach the mass market that we inspire to reach.

And I believe and we’ll find this out after we do our research that we’ve improved dramatically our awareness, our brand awareness in U.S. and now is time to step it up and encourage consumers to take the next step and purchase the product and we would achieve trial and usage. So we need TV for that. That’s why we also need to up the spend.

Jim Chartier - Monness Crespi

Great. And finally, I know you are managing this for the long-term and in 2012 you reinvested a lot of the sales upside and to increase investments and marketing. How should we thinking about any potential sales upside flowing through in 2013. Do you plan to reinvest as much of that next year you did in 2012.

Daniel Birnbaum

Absolutely. We are focusing on growth and we are also doing it responsibly and we want to deliver responsible bottom line. But we were a growth company. We want to take advantage of the moment we have and take market share here.

And we are doing it through the product innovation like Source and caps, and through the partnerships like Kraft and Samsung, and through market expansion and channel expansion and create a consumer marketing is very, very important.

The results prove that it’s working. So we shouldn’t stop doing this. We want step on the accelerator, focus on topline and we are in a mission here to be a much, much larger company.

Gerard Meyer

You know that in U.S. we have right now approximately 1% [topline] penetration and in other markets we manage to achieve over 20%. So we still have a long way to go and we certainly to invest a lot in the market and we have lots of potential of growth in future.

Jim Chartier - Monness Crespi

Great. Thanks a lot.

Operator

Our next question comes from Greg McKinley with Dougherty.

Greg McKinley - Dougherty

Yeah. Thank you. Could you expand a little bit more on the discussion just had on your marketing spend. Should we expect any changes in terms of the seasonality of when you’re spending that 16% of revenue or should we expect it to be quite similar to other timing of expenditures in 2012?

Daniel Birnbaum

We don’t provide the breakdown right now, the quarterly breakdown of the activities but it’s natural to assume that higher expenditure would be around as it was this year and the years before around the holiday season and around special time.

Greg McKinley - Dougherty

And what would some of those special times be other than the typical U.S. holidays?

Gerard Meyer

We’re always in the U.S. This is Gerard. Q4 is obviously huge but we also find a very strong period during Q2, which is around Mother’s Day, Father’s Day, Memorial Day. So those are the special occasions where people would actually think about investing and buying a home soda maker and that’s kind of where we focus a lot of our effort because we are driving out for penetration.

Danny Erdreich

Right. And rest of world is less skewed towards Q4 spending because the holiday season is less -- less of, I guess, gifting season for them and then rest of the world, our special time would be Q2, which is spring and early summer where we tend to have seasonality swings -- positive seasonality swings.

But the actual question, we expect the breakdown of A&P spend to be similar to 2012 with a slight exception than in Q1, we had the incremental expense of the Super Bowl.

Greg McKinley - Dougherty

Okay. Can you talk a little bit about the role you think new markets geographically will play in ‘13. I know the companies talked about markets like India, China, Mexico, Brazil. Maybe give us a sense for what role some of those -- how significant the efforts will be in a couple of those new markets. And just help us better understand the timing and your expectations there?

Daniel Birnbaum

From our experience, when we enter a new market, it usually takes about three years until we start generating material sales. There is a process of getting certified and getting the reverse logistic setup and getting the formulas for the food items prepared and made to taste and setting up the team in retail distribution and that’s our experience.

We’ve had some anomalies. We’ve had Japan show a very strong ramp-up in the first year but I wouldn’t bank too much on the new market for the first year or two. It’s more important that we get them seated so that down the road we can play there and be material players.

But I hope that in 2013, we should be able to see some more material sales from markets like Brazil, which we entered almost a year ago. Chile will be a good market which we entered about six months ago and already had some early holiday sales, initial holiday sales and some other markets that we entered in the first year plus in some of the international markets, we are replacing distributors.

For example, in Russia, we recently replaced our distributor, who wasn’t performing to our standard. So we might enjoy some upside over there. But again, we’re not going to the bank with it until we see that we’re actually delivering those results.

Greg McKinley - Dougherty

Okay. Thank you. And then last question, just getting back to your capacity expansion, can you give us a sense for how significant in terms of volume the million dollar, I’m sorry, million square foot facility will be relative to your capabilities today. And then will that also result in consolidation of your facilities. You said, today you’re actually trucking around product through seven different facilities in Israel. So what’s the percentage increase in volume and will that consolidate some of those facilities?

Daniel Birnbaum

Yeah. It will consolidate absolutely. We’ll have one site with four factories on it basically. The four factories will be by discipline, by manufacturing discipline, it will be metal, plastics, flavors and assembly. And we won’t have to truck from factory to factory. It will all be done by either automatic vehicles or forklift et cetera. So there will be tremendous savings in that.

Less work in process, inventory, because they’re all in one side. Savings from the margins we currently leave with subcontractors. And as far as capacity goes, roughly speaking it will double our existing capacity in-house. So today we can do any amount.

I mean, if theoretically we had a tremendous boom in demand, we could deliver it. But we’d have to rely on subcontractors. Once the factory is going to be up and running, we should be able to deliver many, many more than we’re doing right now. So if right now, we did 3.5 million soda makers, I’d expect that our capacity in the new factory with the spent -- the capital expense plan that we have right now should be in the area of about 7 million soda makers in-house.

We can increase that because of the size of the facility. We can increase that with tooling if we need to. So we expect that the new facility which would be completely up and running in a year and half or so, should be -- should meet our demands and again we can extend it further if needed.

Now, we also have the existing infrastructure of subcontractors, both in Israel and in China and our existing facilities in Israel. We will decide what to do with that network of capacity at the time we have to make that decision. If we need it for additional capacity, we will keep it. If we don’t need it, we will have everything located in one site.

Greg McKinley - Dougherty

Great.

Daniel Birnbaum

Greg. I would also add that our syrup demands are growing and we are going to be adding syrup capacity in the United States, with a partner we’ll announce shortly which will help address the Americas markets as well and that’s going to take place in the first half of this year.

Greg McKinley - Dougherty

Great. And then just lastly, what does this all mean for CapEx for ‘13?

Danny Erdreich

2013 CapEx is going to be -- is going to grow materially. We are going to have between $75 million to $80 million of CapEx going into next year. Approximately, 60% of it will go to the new factory and this will be the main year of investment in the new production site.

Greg McKinley - Dougherty

Thank you.

Daniel Birnbaum

By the way, the ROI on this factory is five year payback period and we are getting tremendous government assistance in the capital expenditures as well as other benefits down the road and in terms of labor and tax.

Operator

Our final question comes from Jim Duffy from Stifel Nicolaus.

Jim Duffy - Stifel Nicolaus

Thanks. Hello, everyone.

Daniel Birnbaum

Hi, Jim.

Jim Duffy - Stifel Nicolaus

Daniel, is there any more or are you prepared to provide around the test and new channel partners you have planned for ‘13, any disclosing or anything on the new channel partners?

Danny Erdreich

I think Daniel mentioned in his prepared remarks. When we talk about new channels, we are looking at channels such as DIY. We are looking at drug, we are looking at more grocery, we are also looking at penetrating some of existing channels we are in more broadly, home shopping, e-commerce and others. There is a bunch of channels and partners that we’re not in yet and we are going to go through.

Daniel Birnbaum

Jim, an example of growth channels that come with partnerships is the Samsung deal, which Samsung is going to be shipping a refrigerator with our carbonator in channels that we are not currently in. So that would be a natural place for us to have an exchange program in the DIY and home electric type of channels as an example.

Danny Erdreich

And in fact, some of these channels might just have consumables and some might have machines and some might have both, which is something else to note.

Jim Duffy - Stifel Nicolaus

Got it. Okay. Danny, a couple of modeling questions. On the tax rate, you guys are making a lot of investments in Israel, employing a lot of people, seems there still should be good opportunity there with the Israeli government. As you look forward, what are some of the puts and takes that influence the tax rate?

Danny Erdreich

Well, first of all, note that the 10% tax rate is relatively low effective tax rate and this indicates the benefits that we are getting from the Israeli government. So it’s already plugged into the numbers and yeah, we consider to be an exporter coming out of Israel and we are getting lots of benefits both in terms of grants and in lower tax rates and 10% tax rate is pretty low.

Jim Duffy - Stifel Nicolaus

Okay. But do you think the tax rate that you saw for 2012 is you are not likely to return to that or there is an opportunity to return to that?

Danny Erdreich

2012 was -- as we said was a year in which we reached several agreements with accessory fees and this enables us to release some of our tax provisions. So it was impacted by these items.

Jim Duffy - Stifel Nicolaus

Okay. Last question and I will let you guys go. With the incremental stock comp, any meaningful change to the expected diluted share count for ‘13?

Danny Erdreich

I’d say it won’t be meaningful but it will be approximately 1% increase.

Jim Duffy - Stifel Nicolaus

Great. Thanks, guys.

Danny Erdreich

Thanks a lot, Jim.

Operator

I would now like to turn the conference back over to Mr. Daniel Birnbaum.

Daniel Birnbaum

Thanks a lot. Okay. I would like to thank everyone for joining the call today and if any of your will be at the IHA Show in Chicago, which is between March 2nd and March 5th, please stop by at our booth to say hello. Have a great day.

Operator

This does conclude today’s conference call. Thank you all for your participation.

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